taiwan cooperative bank, ltd. · the date of our auditors’ report. however, future events or...

Taiwan Cooperative Bank, Ltd. Financial Statements for the Years Ended December 31, 2017 and 2016 and Independent Auditors’ Report

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INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholder

Taiwan Cooperative Bank, Ltd.

Opinion

We have audited the accompanying financial statements of Taiwan Cooperative Bank, Ltd., which

comprise the balance sheets as of December 31, 2017 and 2016, and the statements of comprehensive

income, changes in equity and cash flows for the years then ended, and the notes to the financial

statements, including a summary of significant accounting policies.

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial

position of Taiwan Cooperative Bank, Ltd. as of December 31, 2017 and 2016, and its financial

performance and its cash flows for the years then ended in accordance with the Regulations Governing

the Preparation of Financial Reports by Public Banks and Regulations Governing the Preparation of

Financial Reports by Securities Firms.

Basis for Opinion

We conducted our audits in accordance with the Regulations Governing Auditing and Attestation of

Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards

generally accepted in the Republic of China. Our responsibilities under those standards are further

described in the Auditors’ Responsibilities for the Audit of the Financial Statements section of our report.

We are independent of Taiwan Cooperative Bank, Ltd. in accordance with The Norm of Professional

Ethics for Certified Public Accountant of the Republic of China, and we have fulfilled our other ethical

responsibilities in accordance with these requirements. We believe that the audit evidence we have

obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our

audit of the financial statements of Taiwan Cooperative Bank, Ltd. for the year ended December 31, 2017.

These matters were addressed in the context of our audit of the financial statements as a whole, and in

forming our opinion thereon, and we do not provide a separate opinion on these matters.

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Key audit matters in our audit of the financial statements for the year ended December 31, 2017 were as

follows:

Impairment Assessment on Discounts and Loans

The discounts and loans of Taiwan Cooperative Bank, Ltd. as of December 31, 2017 were

$2,019,276,445 thousand, consisting 63% of total assets. Therefore, the assessment on the impairment

loss of the discounts and loans may have significant impacts on the financial statements. The

assessment on the impairment of the discounts and loans performed by the management of the Bank is

based on whether there is any objective evidence of impairment. The amount of impairment loss is the

difference between the book value and the estimated future cash flows of the discounts and loans (with

consideration to the collaterals and guarantees). In addition, the amount of provisions of impairment

loss made should also be in accordance with FSC guidelines. Impairment assessment on discounts and

loans was identified as a key audit matter due to the critical judgements and estimations involved. For

accounting policies and critical accounting judgements and estimations, refer to Notes 4 and 5 to the

financial statements; for discounts and loans, refer to Note 11.

With respect to the critical judgements, estimations, and assumptions used, the procedures we performed

were as follows:

1. Understand and test the internal control of impairment assessment on discounts and loans performed

by the Bank.

2. Sample loans that are individually assessed for impairment loss to evaluate the reasonableness of

estimated future cash flow, including the assumptions, discount rates and the value of collaterals.

3. Test the assumption pertaining to the model, data, and calculation for loans that are assessed

collectively for impairment loss, including the historical data adopted, the classification of similar

credit risk, recovery rate, and the impairment rate.

4. Test the classification of credit assets of the Bank to evaluate whether the classification of credit

assets and provisions of impairment loss are in accordance with the FSC guidelines by considering

the length of overdue of the loans and the value of collaterals.

Assessment on Retired Employees’ Preferential Deposit Benefits

The present value of retired employees’ preferential deposit obligation was calculated based on the

actuarial results with application of various assumptions. Assessment on the retired employees’

preferential deposit benefits was identified as a key audit matters due to the application of critical

judgements and estimations. For the accounting policies and critical accounting judgements and

estimations, refer to Notes 4 and 5 to the financial statements; for the employees’ preferential deposit

benefits, refer to Notes 26 and 27.

With respect to the actuarial report of retired employees’ preferential deposit obligation, the procedures

we performed were as follows:

1. Evaluate the actuary on the basis of qualification, competency, and objectivity.

2. Evaluate the reasonableness of the actuarial assumptions and method applied, including discount

rates, return on deposit, account balance decrease rate per year, and rate of probability of change in

the preferential deposit system.

3. Obtain and evaluate the completeness and accuracy of the information used by the actuary.

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Impairment Assessment on Goodwill

When the management of the Bank determines whether goodwill is impaired, estimation of the value in

use of the cash-generating units to which goodwill has been allocated is required. The calculation of

value in use requires the management to estimate the future cash flows expected to arise from the

cash-generating units and a suitable discount rate in order to calculate present value. Impairment

assessment on goodwill was identified as a key audit matters due to the critical judgements and

estimations involved. For the accounting policies and critical accounting judgements and estimations,

refer to Notes 4 and 5 to the financial statements; for impairment assessment on goodwill, refer to

Note 18.

With respect to the report of impairment assessment on goodwill and the report of discount rate used in

assessment, the procedures we performed were as follows:

1. Evaluate the external expert on the basis of qualification, competency, and objectivity.

2. Evaluate the reasonableness of model and assumptions used by the external expert.

3. Obtain and evaluate the completeness and accuracy of the information used by the external expert.

4. Evaluate the reasonableness of the expected future cash flows arising from the cash-generating units

allocated to goodwill.

Correctness of Recognized Loan Interest Income

The loan interest income of Taiwan Cooperative Bank, Ltd. for the year ended December 31, 2017 was

$39,483,830 thousand, consisting 78% of total interest income. Of the amount, domestic loan interest

income was $35,463,240 thousand, consisting 90% of total interest income on discounts and loans, the

major source of income of the Bank. Therefore, the correctness of domestic loan interest income has a

significant impact on the financial statements. In addition, since loan interest income depends highly on

automated calculations, the information technology environment and the effectiveness of general

information technology controls also have significant impact on the recognition of domestic loan interest

income. Therefore, recognition of interest income was identified as a key audit matter. For accounting

policies, refer to Note 4 to the financial statements; for recognized loan interest income, refer to Note 28.

With respect to the correctness of recognized domestic loan interest income, the procedures we performed

were as follows:

1. Understand and test the internal controls on the calculation of domestic loan interest income of the

Bank.

2. Understand the information technology environment and general information technology controls of

the Bank particularly on domestic loan interest income, and test the effectiveness of the controls,

which include the automated controls of relevant application systems.

3. Select samples from the Bank’s domestic loan interest income summary table, and verify the

correctness of major parameters set for calculation of loan interest income, including amount of loans,

loan period and interest rate.

4. Select samples of domestic loan information in a certain period from the Bank’s information system,

including amount of loans, loan period, interest rate and other major parameters. Understand and

assess the reasonableness of the computing of the Bank’s loan interest in each category, and

recalculate loan interest income and verify the correctness of recognized interest income.

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Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in

accordance with the Regulations Governing the Preparation of Financial Reports by Public Banks and the

Regulations Governing the Preparation of Financial Reports by Securities Firms, and for such internal

control as management determines is necessary to enable the preparation of financial statements that are

free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing Taiwan Cooperative Bank,

Ltd.’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern

and using the going concern basis of accounting unless management either intends to liquidate the Bank

or to cease operations, or has no realistic alternative but to do so.

Those charged with governance, including supervisors, are responsible for overseeing the Bank’s

financial reporting process.

Auditors’ Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are

free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that

includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an

audit conducted in accordance with auditing standards generally accepted in the Republic of China will

always detect a material misstatement when it exists. Misstatements can arise from fraud or error and

are considered material if, individually or in the aggregate, they could reasonably be expected to influence

the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with auditing standards generally accepted in the Republic of China, we

exercise professional judgment and maintain professional skepticism throughout the audit. We also:

1. Identify and assess the risks of material misstatement of the financial statements, whether due to

fraud or error, design and perform audit procedures responsive to those risks, and obtain audit

evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not

detecting a material misstatement resulting from fraud is higher than for one resulting from error, as

fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of

internal control.

2. Obtain an understanding of internal control relevant to the audit in order to design audit procedures

that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the

effectiveness of Taiwan Cooperative Bank, Ltd.’s internal control.

3. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting

estimates and related disclosures made by management.

4. Conclude on the appropriateness of management’s use of the going concern basis of accounting and,

based on the audit evidence obtained, whether a material uncertainty exists related to events or

conditions that may cast significant doubt on Taiwan Cooperative Bank, Ltd.’s ability to continue as

a going concern. If we conclude that a material uncertainty exists, we are required to draw attention

in our auditors’ report to the related disclosures in the financial statements or, if such disclosures are

inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to

the date of our auditors’ report. However, future events or conditions may cause Taiwan

Cooperative Bank, Ltd. to cease to continue as a going concern.

5. Evaluate the overall presentation, structure and content of the financial statements, including the

disclosures, and whether the financial statements represent the underlying transactions and events in

a manner that achieves fair presentation.

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6. Obtain sufficient and appropriate audit evidence regarding the financial information of entities or

business activities within Taiwan Cooperative Bank, Ltd. to express an opinion on the financial

statements. We are responsible for the direction, supervision, and performance of the group audit.

We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope

and timing of the audit and significant audit findings, including any significant deficiencies in internal

control that we identify during our audit.

From the matters communicated with those charged with governance, we determine those matters that

were of most significance in the audit of the financial statements for the year ended December 31, 2017

and are therefore the key audit matters. We describe these matters in our auditors’ report unless law or

regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we

determine that a matter should not be communicated in our report because the adverse consequences of

doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partners on the audit resulting in this independent auditors’ report are Li-Chi Chen and

Cheng-Hung Kuo.

Deloitte & Touche

Taipei, Taiwan

Republic of China

March 23, 2018

Notice to Readers

The accompanying financial statements are intended only to present the financial position, financial

performance and cash flows in accordance with accounting principles and practices generally accepted

in the Republic of China and not those of any other jurisdictions. The standards, procedures and

practices to audit such financial statements are those generally applied in the Republic of China.

For the convenience of readers, the independent auditors’ report and the accompanying financial

statements have been translated into English from the original Chinese version prepared and used in the

Republic of China. If there is any conflict between the English version and the original Chinese version

or any difference in the interpretation of the two versions, the Chinese-language independent auditors’

report and financial statements shall prevail.

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TAIWAN COOPERATIVE BANK, LTD.

BALANCE SHEETS

DECEMBER 31, 2017 AND 2016

(In Thousands of New Taiwan Dollars)

2017 2016

ASSETS Amount % Amount %

CASH AND CASH EQUIVALENTS (Notes 4, 6 and 35) $ 63,562,455 2 $ 54,064,826 2

DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS (Notes 4, 7, 35 and 36) 274,341,552 9 302,017,438 10

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 4, 8 and 35) 12,862,843 - 27,866,137 1

SECURITIES PURCHASED UNDER RESELL AGREEMENTS (Notes 4, 9 and 35) 249,463 - - -

RECEIVABLES, NET (Notes 4, 10, 35 and 42) 18,593,582 1 14,808,694 1

CURRENT TAX ASSETS (Notes 4, 32 and 35) 1,402,132 - 1,187,408 -

DISCOUNTS AND LOANS, NET (Notes 4, 11, 35 and 36) 1,993,819,434 63 1,958,508,412 62

AVAILABLE-FOR-SALE FINANCIAL ASSETS, NET (Notes 4, 12 and 36) 154,441,496 5 123,640,946 4

HELD-TO-MATURITY FINANCIAL ASSETS (Notes 4, 13 and 36) 513,789,325 16 510,048,964 16

INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD (Notes 4 and 14) 2,073,809 - 1,882,267 -

OTHER FINANCIAL ASSETS, NET (Notes 4, 15, 35 and 36) 107,002,789 3 99,887,733 3

PROPERTIES AND EQUIPMENT, NET (Notes 4 and 16) 33,926,763 1 37,962,847 1

INVESTMENT PROPERTIES, NET (Notes 4 and 17) 6,984,409 - 2,886,363 -

INTANGIBLE ASSETS (Notes 4 and 18) 3,513,492 - 3,545,312 -

DEFERRED TAX ASSETS (Notes 4 and 32) 1,282,022 - 954,971 -

OTHER ASSETS (Notes 4, 19 and 37) 606,519 - 711,131 -

TOTAL $ 3,188,452,085 100 $ 3,139,973,449 100

LIABILITIES AND EQUITY

DUE TO THE CENTRAL BANK AND OTHER BANKS (Notes 20 and 35) $ 212,300,065 7 $ 225,668,911 7

FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (Notes 4, 8, 24 and 35) 14,450,851 1 14,631,011 1

SECURITIES SOLD UNDER REPURCHASE AGREEMENTS (Notes 4, 8, 12 and 21) 10,377,142 - 12,000,831 -

PAYABLES (Notes 22 and 35) 45,179,629 2 44,120,225 2

CURRENT TAX LIABILITIES (Notes 4, 32 and 35) 1,185,896 - 328,375 -

DEPOSITS AND REMITTANCES (Notes 23 and 35) 2,624,598,335 82 2,564,157,192 82

BANK DEBENTURES (Note 24) 64,610,000 2 74,610,000 2

OTHER FINANCIAL LIABILITIES (Notes 4, 25, 35 and 37) 3,749,545 - 2,614,125 -

PROVISIONS (Notes 4, 26 and 27) 7,624,197 - 7,171,678 -

DEFERRED TAX LIABILITIES (Notes 4, 16 and 32) 2,996,390 - 3,261,164 -

OTHER LIABILITIES 1,119,382 - 1,170,965 -

Total liabilities 2,988,191,432 94 2,949,734,477 94

EQUITY

Capital stock

Common stock 88,081,300 3 85,863,000 3

Capital surplus

Additional paid-in capital from share issuance in excess of par value 58,664,088 2 55,882,340 2

From treasury stock transactions 103,157 - 103,157 -

Total capital surplus 58,767,245 2 55,985,497 2

Retained earnings

Legal reserve 32,982,547 1 29,225,467 1

Special reserve 1,280,201 - 1,217,583 -

Unappropriated earnings 18,723,762 - 18,697,129 -

Total retained earnings 52,986,510 1 49,140,179 1

Other equity 425,598 - (749,704) -

Total equity 200,260,653 6 190,238,972 6

TOTAL $ 3,188,452,085 100 $ 3,139,973,449 100

The accompanying notes are an integral part of the financial statements.

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STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

(In Thousands of New Taiwan Dollars, Except Earnings Per Share)

Percentage

2017 2016 Increase

(Decrease)

Amount % Amount % %

INTEREST REVENUE (Notes 4, 28

and 35) $ 50,739,405 120 $ 50,110,097 123 1

INTEREST EXPENSE (Notes 4, 28

and 35) (18,440,708) (44) (18,707,695) (46) (1)

NET INTEREST 32,298,697 76 31,402,402 77 3

NET REVENUES AND GAINS OTHER

THAN INTEREST

Service fee income, net (Notes 4, 29,

35 and 42) 5,924,892 14 6,267,528 15 (5)

Losses on financial assets and

liabilities at fair value through profit

or loss (Notes 4, 30 and 35) (2,023,677) (5) (592,346) (1) 242

Realized gains on available-for-sale

financial assets (Note 4) 923,358 2 1,202,764 3 (23)

Foreign exchange gains, net (Note 4) 4,807,785 12 1,407,642 3 242

Reversal of impairment losses on

assets (Notes 4, 12 and 13) 7,895 - 6,351 - 24

Share of gains of subsidiaries,

associates and joint ventures

accounted for using the equity

method (Notes 4 and 14) 114,050 - 107,183 - 6

Gains on financial assets carried at

cost, net (Note 4) 279,275 1 285,035 1 (2)

Gains on debt instruments with no

active market, net (Note 4) 30,725 - 153,778 - (80)

Other noninterest gains (losses), net

(Notes 35 and 42) (1,297) - 594,637 2 (100)

Total net revenues and gains

other than interest 10,063,006 24 9,432,572 23 7

TOTAL NET REVENUES 42,361,703 100 40,834,974 100 4

BAD-DEBT EXPENSES AND

PROVISION FOR LOSSES ON

GUARANTEES (Notes 4 and 11) (5,302,494) (13) (3,802,662) (9) 39

(Continued)

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Percentage

2017 2016 Increase

(Decrease)

Amount % Amount % %

OPERATING EXPENSES (Notes 4, 16,

17, 18, 27, 31 and 35)

Employee benefits $ (14,614,056) (35) $ (14,757,601) (36) (1)

Depreciation and amortization (1,058,025) (2) (1,075,976) (3) (2)

General and administrative (6,501,534) (15) (6,652,502) (16) (2)

Total operating expenses (22,173,615) (52) (22,486,079) (55) (1)

INCOME BEFORE INCOME TAX 14,885,594 35 14,546,233 36 2

INCOME TAX EXPENSE (Notes 4

and 32) (1,986,400) (5) (2,022,632) (5) (2)

NET INCOME 12,899,194 30 12,523,601 31 3

OTHER COMPREHENSIVE INCOME

Items that will not be reclassified

subsequently to profit or loss

(Notes 4 and 27)

Remeasurement of defined benefit

plans (348,963) (1) (46,589) - 649

Changes in the fair value

attributable to changes in the

credit risk of financial liabilities

designated as at fair value

through profit or loss (32,084) - 32,330 - (199)

Items that will not be reclassified

subsequently to profit or loss,

net of income tax (381,047) (1) (14,259) - 2,572

Items that may be reclassified

subsequently to profit or loss

(Notes 4, 14 and 32)

Exchange differences on the

translation of financial statements

of foreign operations (1,473,014) (4) (203,063) (1) 625

Unrealized gains (losses) on

available-for-sale financial assets 2,361,509 6 (1,588,002) (4) 249

(Continued)

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Percentage

2017 2016 Increase

(Decrease)

Amount % Amount % %

Share of other comprehensive

income (losses) of subsidiaries,

associates and joint ventures

accounted for using the equity

method $ 83,561 - $ (100,089) - 183

Income tax attributable to other

comprehensive income 235,330 1 50,908 - 362

Items that may be reclassified

subsequently to profit or loss,

net of income tax 1,207,386 3 (1,840,246) (5) 166

Other comprehensive income

(losses), net of income tax 826,339 2 (1,854,505) (5) 145

TOTAL COMPREHENSIVE INCOME $ 13,725,533 32 $ 10,669,096 26 29

EARNINGS PER SHARE (NEW

TAIWAN DOLLARS; Note 33)

Basic $1.48 $1.48

The accompanying notes are an integral part of the financial statements. (Concluded)

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STATEMENTS OF CHANGES IN EQUITY



Other Equity

Capital Stock (Note 34) Retained Earnings (Notes 4 and 34)

Exchange Differences

on the Translation of

Financial Statements

Unrealized Gains

(Losses) on

Available-for-sale

Changes in the Fair

Value Attributable to

Changes in the Credit

Risk of Financial

Liabilities Designated

as at Fair Value

Shares

(In Thousands) Common Stock

Capital Surplus

(Notes 4 and 34) Legal Reserve Special Reserve

Unappropriated

Earnings

of Foreign Operations

(Note 4)

Financial Assets

(Note 4)

through Profit or

Loss (Note 4) Total Equity

BALANCE, JANUARY 1, 2016 8,349,300 $ 83,493,000 $ 53,054,992 $ 25,586,622 $ 1,217,583 $ 18,349,592 $ 287,893 $ 768,151 $ 2,168 $ 182,760,001

Appropriation of the 2015 earnings

Legal reserve - - - 3,638,845 - (3,638,845 ) - - - -

Cash dividends - - - - - (8,490,630 ) - - - (8,490,630 )

Capital increase in June 2016 237,000 2,370,000 2,930,505 - - - - - - 5,300,505

Total comprehensive income

Net income for the year ended December 31, 2016 - - - - - 12,523,601 - - - 12,523,601

Other comprehensive losses for the year ended December 31, 2016 - - - - - (46,589 ) (251,368 ) (1,588,878 ) 32,330 (1,854,505 )

Total comprehensive income for the year ended December 31, 2016 - - - - - 12,477,012 (251,368 ) (1,588,878 ) 32,330 10,669,096

BALANCE, DECEMBER 31, 2016 8,586,300 85,863,000 55,985,497 29,225,467 1,217,583 18,697,129 36,525 (820,727 ) 34,498 190,238,972

Appropriation of the 2016 earnings Legal reserve - - - 3,757,080 - (3,757,080 ) - - - -

Special reserve - - - - 62,618 (62,618 ) - - - -

Cash dividends - - - - - (8,703,900 ) - - - (8,703,900 )

Capital increase in June 2017 221,830 2,218,300 2,781,748 - - - - - - 5,000,048

Total comprehensive income

Net income for the year ended December 31, 2017 - - - - - 12,899,194 - - - 12,899,194 Other comprehensive income for the year ended December 31, 2017 - - - - - (348,963 ) (1,156,596 ) 2,363,982 (32,084 ) 826,339

Total comprehensive income for the year ended December 31, 2017 - - - - - 12,550,231 (1,156,596 ) 2,363,982 (32,084 ) 13,725,533

BALANCE, DECEMBER 31, 2017 8,808,130 $ 88,081,300 $ 58,767,245 $ 32,982,547 $ 1,280,201 $ 18,723,762 $ (1,120,071 ) $ 1,543,255 $ 2,414 $ 200,260,653

The accompanying notes are an integral part of the financial statements.

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STATEMENTS OF CASH FLOWS



2017 2016

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax $ 14,885,594 $ 14,546,233

Adjustments for:

Depreciation expenses 901,848 902,976

Amortization expenses 156,177 173,000

Bad-debt expenses 5,083,442 3,751,196

Losses on financial assets and liabilities at fair value through profit

or loss 2,023,677 592,346

Interest expense 18,440,708 18,707,695

Interest revenue (50,739,405) (50,110,097)

Dividend income (470,513) (466,036)

Provision for losses on guarantees 219,052 51,466

Share of gains of subsidiaries, associates and joint ventures

accounted for using equity method (114,050) (107,183)

Losses on disposal of properties and equipment 1,820 1,695

Gains on disposal of investment properties - (66)

Gains on disposal of investments (762,845) (1,175,540)

Reversal of impairment losses on financial assets (7,895) (6,351)

Net changes in operating assets and liabilities

Decrease in due from the Central Bank and call loans to other banks 6,532,788 88,499,333

Decrease in financial assets at fair value through profit or loss 23,770,490 1,176,244

Increase in receivables (2,819,033) (955,228)

Decrease (increase) in discount and loans (38,918,151) 11,387,338

Increase in available-for-sale financial assets (30,603,291) (29,369,839)

Increase in held-to-maturity financial assets (4,464,203) (468,082,871)

Decrease (increase) in other financial assets (9,858,636) 538,155

Decrease in other assets 7,697 365,739

Increase (decrease) in due to the Central Bank and other banks (13,368,846) 27,295,934

Decrease in financial liabilities at fair value through profit or loss (9,537,014) (14,030,747)

Decrease in securities sold under repurchase agreements (1,623,689) (5,451,649)

Increase in payables 423,606 8,381,029

Increase in deposits and remittances 60,441,143 59,770,901

Increase (decrease) in other financial liabilities 629,175 (4,621,279)

Decrease in provision for employee benefits (114,986) (2,212,883)

Decrease in other liabilities (55,369) (14,552)

Cash used in operations (29,940,709) (340,463,041)

Interest received 50,531,515 49,750,108

Dividends received 491,369 481,048

Interest paid (18,350,775) (18,877,639)

Income tax paid (1,681,550) (3,110,036)

Net cash generated by (used in) operating activities 1,049,850 (312,219,560)

(Continued)

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2017 2016

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisition for properties and equipment $ (993,300) $ (219,866)

Proceeds of the disposal of properties and equipment 60 -

Increase in refundable deposits - (15,150)

Decrease in refundable deposits 96,902 -

Acquisition for intangible assets (111,389) (75,452)

Proceeds of the disposal of investment properties - 3,861

Decrease in other assets 1,703 7,613

Net cash used in investing activities (1,006,024) (298,994)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds of the issuance of bank debentures 2,000,000 5,000,000

Repayment of bank debentures (12,000,000) -

Increase in guarantee deposits received 506,245 -

Decrease in guarantee deposits received - (473,964)

Dividends paid (8,703,900) (8,490,630)

Capital increase 5,000,048 5,300,505

Net cash generated by (used in) financing activities (13,197,607) 1,335,911

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH

EQUIVALENTS 2,054,575 923,926

NET DECREASE IN CASH AND CASH EQUIVALENTS (11,099,206) (310,258,717)

CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 120,906,483 431,165,200

CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 109,807,277 $ 120,906,483

(Continued)

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Cash and cash equivalent reconciliations:

December 31

2017 2016

Cash and cash equivalents in the balance sheets $ 63,562,455 $ 54,064,826

Due from the Central Bank and call loans to other banks in accordance

with the definition of cash and cash equivalents under IAS 7

“Statement of Cash Flows” 45,698,559 66,841,657

Securities purchased under resell agreements in accordance with the

definition of cash and cash equivalents under IAS 7 “Statement of

Cash Flows” 249,463 -

Other items in accordance with the definition of cash and cash

equivalents under IAS 7 “Statement of Cash Flows” 296,800 -

Cash and cash equivalents, end of the year $ 109,807,277 $ 120,906,483

The accompanying notes are an integral part of the financial statements. (Concluded)

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NOTES TO FINANCIAL STATEMENTS


(In Thousands of New Taiwan Dollars, Unless Stated Otherwise)

1. ORGANIZATION AND OPERATIONS

Taiwan Cooperative Bank, Ltd. (the Bank) was officially established on October 5, 1946 to regulate the

supply of and demand for funds for cooperative organizations by accepting their surplus funds as deposits

and extending working funds to them. On February 10, 2006, the Bank changed its Chinese name upon

approval by the Ministry of Economic Affairs. However, the Bank’s English name remains unchanged.

The Bank became a legal entity in 1985 in accordance with the Banking Law. At the start of 2001, the

Bank was converted into a corporate entity engaged in (a) all commercial banking operations allowed under

the Banking Law; (b) international banking operations; (c) overseas branch operations as authorized by the

respective foreign governments; and (d) other operations as authorized by the central authority-in-charge.

The Bank’s shares have been listed on the Taiwan Stock Exchange since November 17, 2004.

The Bank merged with the Farmers Bank of China (FBC) on May 1, 2006, with the Bank as the survivor

entity.

On June 24, 2011, the Bank’s stockholders approved the establishment of Taiwan Cooperative Financial

Holding Company, Ltd. (TCFHC) by swapping the Bank’s shares with those Co-operative Asset

Management Co., Ltd. (CAM) and Taiwan Cooperative Bills Finance Corporation Ltd. (TCBF) in

accordance with the “Financial Holding Company Act” and other regulations. The boards of directors of

the Bank, CAM and TCBF designated December 1, 2011 as the effective date of the share swap. After the

shares transfer, the Bank became a 100% subsidiary of TCFHC. Also on December 1, 2011, the trading of

the Bank’s stock on the Taiwan Stock Exchange (TSE) was stopped, and TCFHC’s stock started to be

traded on the TSE.

On December 2, 2011, the Bank reduced its capital by NT$3 billion and spun off its Security Department to

incorporate Taiwan Cooperative Securities Corp. (TCS), which became a 100% subsidiary of TCFHC.

In order to integrate resources and enhance operating effectiveness, the board of directors of the Bank and

Cooperative Insurance Brokers Co., Ltd. (CIB) decided to merge the Bank and CIB on April 25, 2016.

The effective date of the merger was June 24, 2016. In this merger, the Bank was the surviving entity.

The Bank has its Head Office in Taipei. It had a Business, International Banking, Finance, Credit Card,

Trust and Insurance Agent Departments as well as 269 domestic branches, an offshore banking unit (OBU),

12 overseas branches and 2 representative office as of December 31, 2017.

The operations of the Bank’s Trust Department are (1) planning, managing and operating the trust business

and (2) custodianship of nondiscretionary trust fund in domestic and overseas securities and mutual funds.

These operations are regulated under the Banking Law and Trust Law of the Republic of China (ROC).

As of December 31, 2017 and 2016, the Bank had 8,059 and 8,262 employees, respectively.

The operating units of the Bank maintain their accounts in their respective functional currencies. The

financial statements are presented in New Taiwan dollars.

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2. APPROVAL OF FINANCIAL STATEMENTS

The parent company only financial statements were approved by the Bank’s board of directors on

March 23, 2018.

3. APPLICATION OF NEW, AMENDED AND REVISED STANDARDS AND INTERPRETATIONS

a. Effects of initial application of the amended Regulations Governing the Preparation of Financial

Reports by Public Banks, Regulations Governing the Preparation of Financial Reports by Securities

Firms, and the International Financial Reporting Standards (IFRS), International Accounting Standards

(IAS), Interpretations of IFRS (IFRIC), and Interpretations of IAS (SIC) endorsed and issued into effect

by the Financial Supervisory Commission (FSC)

The Bank applies Order No. 1050026834 issued by the FSC, the IFRS, IAS, IFRIC and SIC

(collectively, the “IFRSs”) issued by the International Accounting Standards Board (IASB) and

endorsed and issued into effect by the FSC for application starting from 2017, and the amendments to

the Regulations Governing the Preparation of Financial Reports by Public Banks, and Regulations

Governing the Preparation of Financial Reports by Securities Firms.

Except for the following, the initial application of the above New IFRSs in 2017 and related

amendments to the Regulations Governing the Preparation of Financial Reports by Public Banks, and

Regulations Governing the Preparation of Financial Reports by Securities Firms did not have any

material impact on the Bank’s accounting policies:

Amendments to the Regulations Governing the Preparation of Financial Reports by Public Banks and

Regulations Governing the Preparation of Financial Reports by Securities Firms

The amendments include additions of several accounting items and requirements for disclosures of

impairment of non-financial assets as a consequence of the IFRSs endorsed and issued into effect by the

FSC. In addition, as a result of the post implementation review of IFRSs in Taiwan, the amendments

also include emphasis on certain recognition and measurement considerations and add requirements for

disclosures of related party transactions and goodwill.

The amendments stipulate that other companies or institutions of which the chairman of the board of

directors or president serves as the chairman of the board of directors or the president, or is the spouse

or second immediate family of the chairman of the board of directors or president of the Bank are

deemed to have a substantive related party relationship, unless it can be demonstrated that no control,

joint control, or significant influence exists.

The amendments also require additional disclosure if there is a significant difference between the actual

operation after business combination and the expected benefit on acquisition date.

- 16 -

b. Effects of the Regulations Governing the Preparation of Financial Reports by Public Banks,

Regulations Governing the Preparation of Financial Reports by Securities Firms, and the IFRS, IAS,

IFRIC, and SIC endorsed and issued into effect by the FSC for application starting from 2018

New IFRSs

Effective Date

Announced by IASB (Note 1)

Annual Improvements to IFRSs 2014-2016 Cycle Note 2

Amendment to IFRS 2 “Classification and Measurement of

Share-based Payment Transactions”

January 1, 2018

Amendments to IFRS 4 “Applying IFRS 9 Financial Instruments

with IFRS 4 Insurance Contracts”

January 1, 2018

IFRS 9 “Financial Instruments” January 1, 2018

Amendments to IFRS 9 and IFRS 7 “Mandatory Effective Date of

IFRS 9 and Transition Disclosures”

January 1, 2018

IFRS 15 “Revenue from Contracts with Customers” January 1, 2018

Amendment to IFRS 15 “Clarifications to IFRS 15 Revenue from

Contracts with Customers”

January 1, 2018

Amendment to IAS 7 “Disclosure Initiative” January 1, 2017

Amendments to IAS 12 “Recognition of Deferred Tax Assets for

Unrealized Losses”

January 1, 2017

Amendments to IAS 40 “Transfers of Investment Property” January 1, 2018

IFRIC 22 “Foreign Currency Transactions and Advance

Consideration”

January 1, 2018

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on

or after their respective effective dates.

Note 2: The amendment to IFRS 12 is retrospectively applied for annual periods beginning on or after

January 1, 2017; the amendment to IAS 28 is retrospectively applied for annual periods

beginning on or after January 1, 2018.

The initial application of the above New IFRSs, whenever applied, would not have any material impact

on the Bank’s accounting policies, except for the following:

IFRS 9 “Financial Instruments” and related amendments

Classification, measurement and impairment of financial assets

With regards to financial assets, all recognized financial assets that are within the scope of IAS 39

“Financial Instruments: Recognition and Measurement” are subsequently measured at amortized

cost or fair value.

For the Bank’s debt instruments that have contractual cash flows that are solely payments of

principal and interest on the principal amount outstanding, their classification and measurement are

as follows:

1) For debt instruments, if they are held within a business model whose objective is to collect the

contractual cash flows, the financial assets are measured at amortized cost and are assessed for

impairment continuously with impairment loss recognized in profit or loss, if any. Interest

revenue is recognized in profit or loss by using the effective interest method.

- 17 -

2) For debt instruments, if they are held within a business model whose objective is achieved by

both the collecting of contractual cash flows and the selling of financial assets, the financial

assets are measured at fair value through other comprehensive income (FVTOCI) and are

assessed for impairment. Interest revenue is recognized in profit or loss by using the effective

interest method, and other gain or loss shall be recognized in other comprehensive income,

except for impairment gains or losses and foreign exchange gains and losses. When the debt

instruments are derecognized or reclassified, the cumulative gain or loss previously recognized

in other comprehensive income is reclassified from equity to profit or loss.

Except for above, all other financial assets are measured at fair value through profit or loss.

However, the Bank may make an irrevocable election to present subsequent changes in the fair

value of an equity investment (that is not held for trading) in other comprehensive income, with

only dividend income generally recognized in profit or loss. No subsequent impairment

assessment is required, and the cumulative gain or loss previously recognized in other

comprehensive income cannot be reclassified from equity to profit or loss.

The Bank analyzed the facts and circumstances of its financial assets that exist at December 31,

2017 and performed the assessment of the impact of IFRS 9 on the classification and measurement

of financial assets. Under IFRS 9:

1) Listed shares, emerging market shares, and unlisted shares classified as available-for-sale will

be designated as at fair value through other comprehensive income and the fair value gains or

losses accumulated in other equity will be transferred directly to retained earnings instead of

being reclassified to profit or loss on disposal;

2) Mutual funds classified as available-for-sale will be classified as at fair value through profit or

loss because the contractual cash flows are not solely payments of principal and interest on the

principal outstanding and they are not equity instruments; and

3) Debt investments classified as available-for-sale financial assets, held-to-maturity financial

assets and debt investments with no active market that are measured at amortized cost will be

classified as measured at amortized cost under IFRS 9 because on initial recognition, the

contractual cash flows are solely payments of principal and interest on the principal outstanding

and these investments are held within a business model whose objective is to collect the

contractual cash flows. Debt investments classified as available-for-sale financial assets,

held-to-maturity financial assets and debt investments with no active market will be classified as

at fair value through other comprehensive income under IFRS 9 because on initial recognition,

the contractual cash flows are solely payments of principal and interest on the principal

outstanding and these investments are held within a business model whose objective is achieved

both by collecting the contractual cash flows and selling the financial assets.

IFRS 9 requires that impairment loss on financial assets is recognized by using the “Expected Credit

Losses Model”. The loss allowance is required for financial assets measured at amortized cost,

debt investment measured at FVTOCI, lease receivables, contract assets arising from IFRS 15

“Revenue from Contracts with Customers”, certain written loan commitments and financial

guarantee contracts. A loss allowance for the 12-month expected losses is required for a financial

asset if its credit risk has not increased significantly since initial recognition. A loss allowance for

full lifetime expected losses is required for a financial asset if its credit risk has increased

significantly since initial recognition and is not low. However, a loss allowance for full lifetime

expected credit losses is required for trade receivables that do not constitute a financing transaction.

For purchased or originated credit-impaired financial assets, the Bank takes into account the

expected credit losses on initial recognition in calculating the credit-adjusted effective interest rate.

Subsequently, any changes in expected losses are recognized as a loss allowance with a

corresponding gain or loss recognized in profit or loss.

- 18 -

The Bank has performed an assessment that the Bank will apply the simplified approach to

recognize lifetime expected credit losses for trade receivables, contract assets and lease receivables.

In relation to the debt instrument investments and the financial guarantee contracts, the Bank will

assess whether there has been a significant increase in the credit risk to determine whether to

recognize 12-month or lifetime expected credit losses. In general, the Bank anticipates that the

application of the expected credit loss model of IFRS 9 will result in earlier recognition of credit

losses for financial assets.

Transition of classification, measurement and impairment of financial assets

The Bank elects not to restate prior reporting periods when applying the requirements for the

classification, measurement and impairment of financial assets under IFRS 9, but with the

cumulative effect of the initial application will be recognized at the date of initial application and

will provide the disclosures related to the classification and the adjustment information upon initial

application of IFRS 9.

The anticipated impact on assets, liabilities and equity of retrospective application of the

requirements for the classification, measurement and impairment of financial assets as of January 1,

2018 is set out below:

Carrying

Amount as of

December 31,

2017

Adjustments

Arising from

Initial

Application

Adjusted

Carrying

Amount as of

January 1, 2018

Impact on assets, liabilities and equity

Financial assets at fair value through

profit or loss $ 12,862,843 $ 237,173 $ 13,100,016

Financial assets at fair value through other

comprehensive income - 240,695,527 240,695,527

Available-for-sale financial assets, net 154,441,496 (154,441,496) -

Held-to-maturity financial assets 513,789,325 (513,789,325) -

Financial assets measured at amortized

cost - 516,350,907 516,350,907

Financial assets carried at cost 4,092,383 (4,092,383) -

Debt investments with no active market -

current 82,438,716 (82,438,716) -

Receivables, net 18,593,582 (24,128) 18,569,454

Investments accounted for using equity

method 2,073,809 (86) 2,073,723

Total effect on assets $ 788,292,154 $ 2,497,473 $ 790,789,627

Provisions $ 7,624,197 $ 155,129 $ 7,779,326

Total effect on liabilities $ 7,624,197 $ 155,129 $ 7,779,326

Retained earnings $ 52,986,510 $ (314,712) $ 52,671,798

Other equity 425,598 2,657,056 3,082,654

Total effect on equity $ 53,412,108 $ 2,342,344 $ 55,754,452

Except for the above impact, as of the date the financial statements were authorized for issue, the Bank

has assessed that application of other standards and interpretations will not have material impact on the

Bank’s financial position and financial performance.

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c. The Bank has not yet applied the new IFRSs announced by IASB but not yet endorsed and issued into

effect by the FSC

New IFRSs

Effective Date

Announced by IASB (Note 1)

Annual Improvements to IFRSs 2015-2017 Cycle January 1, 2019

Amendments to IFRS 9 “Prepayment Features with Negative

Compensation”

January 1, 2019 (Note 2)

Amendments to IFRS 10 and IAS 28 “Sale or Contribution of Assets

between An Investor and Its Associate or Joint Venture”

To be determined by IASB

IFRS 16 “Leases” January 1, 2019 (Note 3)

IFRS 17 “Insurance Contracts” January 1, 2021

Amendments to IAS 19 “Plan Amendment, Curtailment or

Settlement”

January 1, 2019 (Note 4)

Amendments to IAS 28 “Long-term Interests in Associates and Joint

Ventures”

January 1, 2019

IFRIC 23 “Uncertainty Over Income Tax Treatments” January 1, 2019

Note 1: Unless stated otherwise, the above New IFRSs are effective for annual periods beginning on

or after their respective effective dates.

Note 2: The FSC permits the election for early adoption of the amendments starting from 2018.

Note 3: On December 19, 2017, the FSC announced that IFRS 16 will take effect starting from

January 1, 2019.

Note 4: The Group shall apply these amendments to plan amendments, curtailments or settlements

occurring on or after January 1, 2019.

1) IFRS 16 “Leases”

IFRS 16 sets out the accounting standards for leases that will supersede IAS 17 and a number of

related interpretations.

Under IFRS 16, if the Bank is a lessee, it shall recognize right-of-use assets and lease liabilities for

all leases on the balance sheets except for low-value and short-term leases. The Bank may elect to

apply the accounting method similar to the accounting for operating lease under IAS 17 to the

low-value and short-term leases. On the statements of comprehensive income, the Bank should

present the depreciation expense charged on the right-of-use asset separately from interest expense

accrued on the lease liability; interest is computed by using effective interest method. On the

statements of cash flows, cash payments for the principal portion of the lease liability are classified

within financing activities; cash payments for interest portion are classified within operating

activities.

The application of IFRS 16 is not expected to have a material impact on the accounting of the Bank

as lessor.

When IFRS 16 becomes effective, the Bank may elect to apply this Standard either retrospectively

to each prior reporting period presented or retrospectively with the cumulative effect of the initial

application of this Standard recognized at the date of initial application.

- 20 -

2) IFRIC 23 “Uncertainty Over Income Tax Treatments”

IFRIC 23 clarifies that when there is uncertainty over income tax treatments, the Bank should

assume that the taxation authority will have full knowledge of all related information when making

related examinations. If the Bank concludes that it is probable that the taxation authority will

accept an uncertain tax treatment, the Bank should determine the taxable profit, tax bases, unused

tax losses, unused tax credits or tax rates consistently with the tax treatments used or planned to be

used in its income tax filings. If it is not probable that the taxation authority will accept an

uncertain tax treatment, the Bank should make estimates using either the most likely amount or the

expected value of the tax treatment, depending on which method the entity expects to better predict

the resolution of the uncertainty. The Bank has to reassess its judgments and estimates if facts and

circumstances change.

On initial application, the Bank shall apply IFRIC 23 either retrospectively to each prior reporting

period presented, if this is possible without the use of hindsight, or retrospectively with the

cumulative effect of the initial application of IFRIC 23 recognized at the date of initial application.

Except for the above impact, as of the date the financial statements were authorized for issue, the Bank

is continuously assessing the possible impact that the application of other standards and interpretations

will have on the Bank’s financial position and financial performance, and will disclose the relevant

impact when the assessment is completed.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance

The financial statements have been prepared in accordance with the Regulations Governing the Preparation

of Financial Reports by Public Banks and Regulations Governing the Preparation of Financial Reports by

Securities Firms.

Basis of Preparation

The financial statements have been prepared on the historical cost basis except for financial instruments that

are measured at fair value and net defined benefit liabilities which are measured at the present value of the

defined benefit obligation less the fair value of plan assets.

The fair value measurements are grouped into Levels 1 to 3 based on the degree to which the fair value

measurement inputs are observable and the significance of the inputs to the fair value measurement in its

entirety, which are described as follows:

a. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities;

b. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the

asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

c. Level 3 inputs are unobservable inputs for the asset or liability.

When preparing its financial statements, the Bank used equity method to account for its investment in

subsidiary, associates and joint ventures. In order for the amounts of the net profit for the year, other

comprehensive income for the year and total equity in the parent company only financial statements to be

the same with the amounts attributable to the owner of the Bank in its consolidated financial statements,

adjustments arising from the differences in accounting treatment between parent company only basis and

consolidated basis were made to investments accounted for by equity method, share of profit or loss of

subsidiary, associates and joint ventures, share of other comprehensive income of subsidiary, associates and

joint ventures and related equity items, as appropriate, in the parent company only financial statements.

- 21 -

The financial statements also include accounts of the Bank’s Head Office, OBU, and all branches. All

interoffice account balances and transactions have been eliminated.

Foreign-currency Transactions

The Bank records foreign-currency transactions in the respective currencies in which these are

denominated. Every month-end, foreign currency income and expenses are translated into New Taiwan

dollars at the prevailing exchange rates. At month-end, monetary assets and liabilities denominated in

foreign currencies are reported using the prevailing exchange rates, and exchange differences are

recognized in profit or loss. Nonmonetary assets and liabilities measured at fair value are translated using

the prevailing exchange rates at month-end. Translation differences on nonmonetary assets and liabilities

measured at fair value are recognized in profit or loss, except for translation difference arising from

nonmonetary items of which the change in fair values is recognized in other comprehensive income, in

which case, the translation differences are also recognized directly in other comprehensive income.

Nonmonetary assets and liabilities that are classified as carried at cost are recognized at the exchange rate

on the transaction date.

In preparing the financial statements, foreign operations’ financial statements are translated at the following

rates: Assets and liabilities - the prevailing exchange rates on the balance sheet date; and income and

expenses - at the average exchange rate for the year. Translation difference net of income tax is recorded

as “other comprehensive income” and accumulated in equity.

Classification of Current and Noncurrent Assets and Liabilities

Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the

Bank’s financial statements are not classified as current or noncurrent. Nevertheless, these accounts are

properly categorized in accordance with the nature of each account and sequenced by liquidity.

Cash and Cash Equivalents

In the balance sheet, cash and cash equivalents comprise cash on hand and demand deposits, together with

short-term, highly liquid investments that are readily convertible to a known amount of cash and are subject

to an insignificant risk of changes in value. In the statement of cash flows, cash and cash equivalents

comprise cash and cash equivalents defined in the balance sheet, due from the Central Bank and call loans

to other banks, securities purchased under resell agreements, and call loans to securities firms that

correspond to the definition of cash and cash equivalents in IAS 7 “Cash Flow Statements,” as endorsed by

the FSC.

Financial Instruments

Financial assets and financial liabilities are recognized when the Bank becomes a party to the contractual

provisions of the instruments.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are

directly attributable to the acquisition or issue of financial assets and financial liabilities (other than

financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from

the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition.

Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair

value through profit or loss are recognized immediately in profit or loss.

Financial assets

All regular way purchases or sales of financial assets are recognized and derecognized on a trade date basis.

- 22 -

a. Measurement category

Financial assets are classified into the following categories: Financial assets at fair value through

profit or loss (FVTPL), available-for-sale (AFS) financial assets, held-to-maturity financial assets and

loans and receivables. The classification depends on the nature and purpose of the financial assets and

is determined at the time of initial recognition.

1) Financial assets at FVTPL

Financial assets are classified as at FVTPL when the financial asset is either held for trading or

designated as at FVTPL.

A financial asset is classified as designated as at FVTPL upon initial recognition if:

Such designation eliminates or significantly reduces a measurement or recognition

inconsistency that would otherwise arise; or

The financial asset forms part of a group of financial assets or financial liabilities or both, which

is managed and its performance is evaluated on a fair value basis, in accordance with the Bank’s

documented risk management or investment strategy, and information about the grouping is

provided internally on that basis; or

The contract contains one or more embedded derivatives so that the entire hybrid (combined)

contract can be designated as at fair value through profit or loss.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on

remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss

incorporates any dividend or interest earned on the financial asset. Fair value is determined in the

manner described in Note 38.

2) Available-for-sale (AFS) financial assets

AFS financial assets are non-derivatives that are either designated as AFS or are not classified as (a)

loans and receivables, (b) held-to-maturity financial assets or (c) financial assets at fair value

through profit or loss. AFS financial assets are stated at fair value at each balance sheet date.

Fair value is determined in the manner described in Note 38.

Changes in the carrying amount of AFS monetary financial assets relating to changes in foreign

currency rates, interest income calculated using the effective interest method and dividends on AFS

equity investments are recognized in profit or loss. Other changes in the carrying amount of AFS

financial assets are recognized in other comprehensive income and will be reclassified to profit or

loss when the investment is disposed or is determined to be impaired.

Cash dividends on AFS equity instruments are recognized in profit or loss when the Bank’s right to

receive the dividends is established. Stock dividends are recorded as an increase in the number of

shares held and do not affect investment income. The cost per share is recalculated on the basis of

the new number of investee’s shares held.

AFS financial assets that do not have a quoted market price in an active market and have a fair

value that cannot be reliably measured and derivatives that are linked to and must be settled by

delivery of such unquoted equity investments are measured at cost less any identified impairment

losses at the balance sheet date and are recognized in a separate line item as financial assets carried

at cost. These financial assets are measured at fair values if the fair values can be reliably

measured subsequently. The difference between carrying amount and fair value is recognized in

profit or loss or other comprehensive income. When an AFS financial asset is considered

impaired, the losses are recognized to profit or loss.

- 23 -

3) Held-to-maturity financial assets

Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable

payments and fixed maturity dates that the Bank has the positive intent and ability to hold to

maturity.

After initial recognition, held-to-maturity financial assets are measured at amortized cost using the

effective interest method less any impairment.

4) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that

are not quoted in an active market. Loans and receivables (including cash and cash equivalents,

due from the Central Bank and call loans to other banks, receivables, debt instruments with no

active markets) are measured at amortized cost using the effective interest method less any

impairment.

b. Impairment of financial assets

Financial assets, other than those at fair value through profit or loss, are assessed for indicators of

impairment at the end of each reporting period. Financial assets are considered to be impaired when

there is objective evidence that, as a result of one or more events that occurred after the initial

recognition of the financial asset, the estimated future cash flows of the investment have been affected.

Objective evidence of impairment could include:

Significant financial difficulty of the asset issuer and debtor;

The financial assets becoming overdue;

Probability that the debtor will enter into bankruptcy or undergo financial reorganization.

Amortized cost of the presentation of financial assets (loans and receivables) that are individually

assessed had no objective evidence of impairment are further assessed collectively for impairment.

Objective evidence of impairment of a portfolio of receivables could include the Bank’s past difficulty

in collecting payments and an increase in the number of delayed payments, as well as observable

changes in national or local economic conditions that correlate with defaults on financial assets.

For financial assets carried at amortized cost, the amount of the impairment loss recognized is the

difference between the asset’s carrying amount and the present value of estimated future cash flows

with consideration to the collaterals and guarantees, discounted at the financial asset’s original effective

interest rate.

For financial assets measured at amortized cost, if the impairment loss decreases and the decrease can

be related objectively to an event occurring after the impairment was recognized, the previously

recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of

the investment at the date the impairment is reversed does not exceed what the amortized cost would

have been had the impairment not been recognized.

For AFS equity instruments, a significant or prolonged decline in the fair value of the security below its

cost is considered to be objective evidence of impairment.

When an AFS financial asset is considered impaired, cumulative gains or losses previously recognized

in other comprehensive income are reclassified to profit or loss.

- 24 -

For AFS equity instruments, impairment losses previously recognized in profit or loss are not reversed

through profit or loss. Any increase in fair value subsequent to an impairment loss is recognized in

other comprehensive income. For AFS debt instruments, impairment losses are subsequently reversed

through profit or loss if an increase in the fair value of the investment can be objectively related to an

event occurring after the recognition of the impairment loss.

For financial assets that are carried at cost, the impairment loss is measured as the difference between

the asset’s carrying amount and the present value of the estimated future cash flows discounted at the

current market rate of return for a similar financial asset. This impairment loss will not be reversed in

subsequent periods.

Impairment loss on financial asset is recognized by reducing its carrying amount through the use of an

allowance account. When financial assets are considered uncollectable, they are written off against

the allowance account. Recoveries of amounts previously written off are credited to the allowance

account. Changes in the carrying amount of the allowance account are recognized in profit and loss.

Under FSC guidelines, the Bank should classify credit assets as sound credit assets or unsound credit

assets, with the unsound assets further categorized as special mention, substandard, with collectability

highly doubtful and uncollectable, on the basis of the customers’ financial position, valuation of

collaterals and the length of time the principal repayments or interest payments have become overdue.

The Bank made 100%, 50%, 10%, 2% and 1% provisions for credits deemed uncollectable, with

collectability highly doubtful, substandard, special mention and sound credit assets (excluding assets

that represent claims against an ROC government agency), respectively, as minimum provisions. In

addition, the Bank was required to make provisions of at least 1.5% each for the sound credit assets on

loans granted to Mainland China clients (including short-term trading financing) and for mortgage loans

granted for housing acquisition, renovation and construction.

Credits deemed uncollectable may be written off if the write-off is approved by the board of directors.

c. Derecognition of financial assets

The Bank derecognizes a financial asset only when the contractual rights to the cash flows from the

asset expire, or when it transfers the financial asset and substantially all the risks and rewards of

ownership of the asset to another party. If the Bank retains substantially all the risks and rewards of

ownership of a transferred financial asset, the Bank continues to recognize the financial asset and also

recognizes a collateralized borrowing for the proceeds received.

On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amounts

and the sum of the consideration received, receivable and the cumulative gain or loss that had been

recognized in other comprehensive income and accumulated in equity is recognized in profit or loss.

Equity instruments

The Bank classifies the debt and equity instruments issued either as financial liabilities or as equity in

accordance with the substance of the contractual agreements and the definitions of a financial liability or an

equity instrument.

An equity instrument is any contract that evidences a residual interest in the assets of an entity after

deducting all its liabilities. Equity instruments issued by the Bank are recognized at the proceeds received,

net of direct issue costs.

Repurchase of the Bank’s own equity instruments is recognized and deducted directly in equity. No gain

or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Bank’s own equity

instruments.

- 25 -

Financial liabilities

a. Subsequent measurement

Except for the cases stated below, all financial liabilities are measured at amortized cost using the

effective interest method:

1) Financial liabilities at FVTPL

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading

or designated as at FVTPL.

A financial liability is classified as designated as at FVTPL upon initial recognition if:

Such designation eliminates or significantly reduces a measurement or recognition

inconsistency that would otherwise arise; or

The financial liability forms part of a group of financial assets or financial liabilities or both,

which is managed and its performance is evaluated on a fair value basis, in accordance with the

Bank’s documented risk management or investment strategy, and information about the

grouping is provided internally on that basis; or

The contract contains one or more embedded derivatives so that the entire combined contract

(asset or liability) can be designated as at fair value through profit or loss.

Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on

remeasurement recognized in profit or loss. The net gain or loss recognized in profit or loss

incorporates any interest paid on the financial liability. For a financial liability designated as at

fair value through profit or loss, the amount of changes in fair value attributable to changes in the

credit risk of the liability is presented in other comprehensive income, and it will not be

subsequently reclassified to profit or loss. The gain or loss accumulated in other comprehensive

income will be transferred to retained earnings when the financial liabilities are derecognized. If

this accounting treatment related to credit risk would create or enlarge an accounting mismatch, all

changes in fair value of the liability are presented in profit or loss. Fair value is determined in the

manner described in Note 38.

2) Financial guarantee contracts

Financial guarantee contracts issued by the Bank are not designated as at FVTPL and are

subsequently measured at the higher of (a) the amount of the obligation under the contract, as

determined in accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”;

or (b) the amount initially recognized less, where appropriate, cumulative amortization recognized

in accordance with revenue recognition policies.

b. Derecognition of financial liabilities

The Bank derecognizes financial liabilities only when the Bank’s obligations are discharged or

cancelled or they expire. The difference between the carrying amount of the financial liability

derecognized and the consideration paid (includes transfer of non-cash assets and liabilities assumed) is

recognized in profit or loss.

- 26 -

Derivatives

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are

subsequently remeasured to their fair value at the balance sheet date. The resulting gain or loss is

recognized in profit or loss immediately. If the fair value of a derivative is a positive number, the

derivative is carried as a financial asset and if the fair value is a negative number, the derivative is carried as

a financial liability.

Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet

the definition of a derivative, their risks and characteristics are not closely related to those of the host

contracts and the contracts are not measured at FVTPL.

Overdue Loans

Loans and other credits (including accrued interest) that are overdue for at least six months are classified as

overdue loans in accordance with the guideline issued by the FSC.

Overdue loans (except other credits) are classified as discounts and loans, and the remaining are classified

as other financial assets.

Securities Purchased/Sold Under Resell/Repurchase Agreements

Securities purchased under resell agreements and securities sold under repurchase agreements are generally

treated as collateralized financing transactions. Interest earned on resell agreements or interest incurred on

repurchase agreements is recognized as interest revenue or interest expense over the life of each agreement.

Investments Accounted for Using Equity Method

Investments in subsidiaries, associates and joint ventures are accounted for by the equity method.

Investment in subsidiaries

Subsidiaries (including structured entities) are the entities controlled by the Bank.

Under the equity method, the investment is initially recognized at cost and the carrying amount is increased

or decreased to recognize the Bank’s share of the profit or loss and other comprehensive income of the

subsidiary after the date of acquisition. Besides, the Bank also recognizes the Bank’s share of the change

in other equity of the subsidiary.

Changes in the Bank’s ownership interests in subsidiaries that do not result in the Bank’s loss of control

over the subsidiaries are accounted for as equity transactions. Any difference between the carrying

amounts of the investment and the fair value of the consideration paid or received is recognized directly in

equity.

When the Bank’s share of losses of a subsidiary equals or exceeds its interest in that subsidiary (which

includes any carrying amount of the investment in subsidiary accounted for by the equity method and

long-term interests that, in substance, form part of the Bank’s net investment in the subsidiary), the Bank

continues recognizing its share of further losses.

The acquisition cost in excess of the acquisition-date fair value of the identifiable net assets acquired is

recognized as goodwill. Goodwill is not amortized. The acquisition-date fair value of the net

identifiable assets acquired in excess of the acquisition cost is recognized immediately in profit or loss.

- 27 -

When the Bank ceases to have control over a subsidiary, any retained investment is measured at fair value

at that date and the difference between the previous carrying amount of the subsidiary attributable to the

retained interest and its fair value is included in the determination of the gain or loss. Furthermore, the

Bank accounts for all amounts previously recognized in other comprehensive income in relation to that

subsidiary on the same basis as would be required if the Bank had directly disposed of the related assets or

liabilities.

Profits and losses from downstream transactions with a subsidiary are eliminated in full. Profits and

losses from upstream with a subsidiary and sidestream transactions between subsidiaries are recognized in

the Bank’s financial statements only to the extent of interests in the subsidiary that are not related to the

Bank.

Investment in associates and joint ventures

An associate is an entity over which the Bank has significant influence and that is neither a subsidiary nor

an interest in a joint venture. Joint venture is a joint arrangement whereby the Bank and other parties that

have joint control of the arrangement have rights to the net assets of the arrangement.

The Bank uses the equity method to account for investments in associates and joint ventures. Under the

equity method, investment in an associate or a joint ventures entity is initially recognized at cost and

adjusted thereafter to recognize the Bank’s share of the profit or loss and other comprehensive income of

the associate or jointly controlled entity. The Bank also recognizes the changes in the Bank’s share of

equity of associates or joint ventures.

When the Bank subscribes for additional new shares of the associate or joint ventures at a percentage

different from its existing ownership percentage, the resulting carrying amount of the investment differs

from the amount of the Bank’s proportionate interest in the associate or joint ventures. The Bank records

such a difference as an adjustment to investments with the corresponding amount charged or credited to

capital surplus. If the Bank’s ownership interest is reduced due to the additional subscription of the new

shares of the associate or joint ventures, the proportionate amount of the gains or losses previously

recognized in other comprehensive income in relation to that associate or joint ventures is reclassified to

profit or loss on the same basis as would be required if the investee had directly disposed of the related

assets or liabilities. When the adjustment should be debited to capital surplus, but the capital surplus

recognized from investments accounted for by the equity method is insufficient, the shortage is debited to

retained earnings.

When the Bank’s share of losses of an associate or a joint ventures equals or exceeds its interest in that

associate or joint ventures, which includes any carrying amount of the investment accounted for by the

equity method and long-term interests that, in substance, form part of the Bank’s net investment in the

associate or joint ventures, the Bank discontinues recognizing its share of further losses. Additional losses

and liabilities are recognized only to the extent that the Bank has incurred legal obligations, or constructive

obligations, or made payments on behalf of that associate or joint ventures.

Any excess of the cost of acquisition over the Bank’s share of the net fair value of the identifiable assets

and liabilities of an associate or a joint ventures recognized at the date of acquisition is recognized as

goodwill, which is included within the carrying amount of the investment and is not amortized. Any

excess of the Bank’s share of the net fair value of the identifiable assets and liabilities over the cost of

acquisition, after reassessment, is recognized immediately in profit or loss.

The entire carrying amount of the investment (including goodwill) is tested for impairment as a single asset

by comparing its recoverable amount with its carrying amount. Any impairment loss recognized is

deducted from the carrying amount of the investment. Any reversal of that impairment loss is recognized

to the extent that the recoverable amount of the investment subsequently increases.

- 28 -

The Bank discontinues the use of the equity method from the date on which its investment ceases to be an

associate and a joint venture. Any retained investment is measured at fair value at that date and the fair

value is regarded as its fair value on initial recognition as a financial asset. The difference between the

previous carrying amount of the associate and the joint venture attributable to the retained interest and its

fair value is included in the determination of the gain or loss on disposal of the associate and the joint

venture. The Bank accounts for all amounts previously recognized in other comprehensive income in

relation to that associate and the joint venture on the same basis as would be required if that associate had

directly disposed of the related assets or liabilities. If an investment in an associate becomes an

investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the

Bank continues to apply the equity method and does not remeasure the retained interest.

When the Bank transacts with its associate or joint ventures, profits and losses resulting from the

transactions with the associate or joint ventures are recognized in the Bank’s financial statements only to

the extent of interests in the associate or joint ventures that are not related to the Bank.

Investment Properties

Investment properties are properties held to earn rentals and/or for capital appreciation. Investment

properties also include land held for a currently undetermined future use.

Investment properties are measured initially at cost, including transaction costs. Subsequent to initial

recognition, investment properties are measured at cost less accumulated depreciation and accumulated

impairment loss. Depreciation is recognized using the straight-line method.

Any gain or loss arising on derecognition of the property is calculated as the difference between the net

disposal proceeds and the carrying amount of the asset and is included in profit or loss in the year in which

the property is derecognized.

Properties and Equipment

Properties and equipment are initially recognized at cost and subsequently measured at costs less

accumulated depreciation and accumulated impairment losses.

Land for self-use is not depreciated. Depreciation is recognized using the straight-line method. Each

significant part is depreciated separately. The estimated useful lives, residual values and depreciation

method are reviewed at the end of each reporting period, with the effect of any changes in estimate

accounted for on a prospective basis.

Any gain or loss recognized on the disposal or retirement of an item of property and equipment is the

difference between the sales proceeds and the carrying amount of the asset and is included in profit or loss

in the period in which the asset is derecognized.

Leasing

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and

rewards of ownership to the lessee. All other leases are classified as operating leases.

The Bank as a lessor

Rental income from operating leases is recognized in revenues over the lease periods on a straight-line

basis. Contingent rents arising under operating leases are recognized as income in the year in which they

are incurred.

Lease incentives offered in the operating lease are recognized as an asset. The aggregate cost of

incentives is recognized as a reduction of rental income on a straight-line basis over the lease term.

- 29 -

The Bank as a lessee

Finance leases are initially recognized as assets of the Bank at their fair value at the inception of the lease

or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor

is included in the balance sheet as a finance lease obligation.

Finance expenses implicit in lease payments for each period are recognized immediately in profit or loss,

unless they are directly attributable to qualifying assets, in which case, they are capitalized.

Lease payments under an operating lease are expensed on a straight-line basis over the lease period.

Under operating lease, contingent rentals are recognized as expenses at current year.

Lease incentives received for operating leases are recognized under liabilities. The aggregate benefit of

incentives is recognized as a reduction of rental expense on a straight-line basis over the lease term.

When the Bank sells and leases back a property, the excess of sales proceeds over the carrying amount that

resulted from the sale of the property is deferred and amortized over the lease term regardless of whether

operating lease or finance lease. For indefinite lease term, the excess is amortized over 10 years.

Goodwill

Goodwill (part of intangible assets) from business combination is recorded at acquisition cost and

subsequently measured at cost less accumulated impairment.

For the purposes of impairment testing, goodwill is allocated to each of the Bank’s cash-generating units or

groups of cash-generating units (referred to as cash-generating units (CGU)) that is expected to benefit from

the synergies of the combination.

In testing assets for impairment, the Bank compares the carrying amounts of operating segments (CGUs

with allocated goodwill) to their recoverable amounts on a yearly basis (or when impairment indicators

exist). CGUs with allocated goodwill arise from the current year should be tested for impairment before

the end of the year. When the recoverable amount of CGUs is below the carrying amount, an impairment

loss should be recognized to reduce first the carrying amount of goodwill of the CGU and then the carrying

amounts of other assets of the CGU proportionately. Any impairment loss should be directly recognized

as loss in the current year, and subsequent reversal of impairment loss is not allowed.

On disposal of the relevant cash-generating unit, the amount attributable to goodwill is included in the

determination of the profit or loss on disposal.

Intangible Assets Other Than Goodwill

Separate acquisition

Intangible assets with finite useful lives that are acquired separately are initially measured at cost and

subsequently measured at cost less accumulated amortization and accumulated impairment losses.

Amortization is recognized on a straight-line basis. At year-end, the Bank examines its estimates of the

useful lives, residual values and amortization method of the assets, and any changes in estimates are

accounted for prospectively. Unless the Bank expects to dispose of an intangible asset before the end of

its useful life, the residual value of an intangible asset with limited useful life is estimated to be zero. The

effect of any changes in estimates accounted for on a prospective basis.

Acquisition as part of a business combination

Intangible asset acquired through business combination is measured at its fair value on the acquisition date,

and is recognized separately from goodwill. Subsequent to initial recognition, they are measured on the

same basis as intangible assets that are acquired separately.

- 30 -

Derecognition

Gains or losses arising from derecognition of an intangible asset, measured as the difference between the

net disposal proceeds and the carrying amount of the asset, are recognized in profit or loss when the assets

is derecognized.

Impairment of Tangible and Intangible Assets Other Than Goodwill

At the balance sheet date, the Bank reviews the carrying amounts of its tangible and intangible assets

(except goodwill) for any indication of impairment loss. If any such indication exists, the recoverable

amount of the asset is estimated in order to determine the extent of the impairment loss. Corporate assets

are allocated to the individual cash-generating units or a reasonable and consistent basis of allocation. The

recoverable amount is the higher of fair value less selling costs or value in use.

If the recoverable amount of an asset or cash-generating unit is estimated to be less than its carrying

amount, the carrying amount is reduced to its recoverable amount. If asset impairment loss reverses, the

increase in the carrying amount resulting from reversal is credited to earnings. However, loss reversal

should not be more than the carrying amount (net of depreciation or amortization) had the impairment loss

not been recognized.

Foreclosed Collaterals

Foreclosed collaterals (part of other assets) are recorded at the fair value on recognition and recorded at the

lower of cost or net fair value as of the balance sheet dates. Net fair value falling below book value

indicates impairment, and impairment loss should be recognized. If the net fair value recovers, the

recovery of impairment loss is recognized in gains. For foreclosed collaterals that should have been

disposed of in the statutory term, unless the disposal period is prolonged, additional provision for losses

should be made and impairment loss should be recognized, as required under a FSC directive.

Provisions

Provisions are the best estimate of the consideration required to settle the present obligation at the balance

sheet date, taking into account the risks and uncertainties on the obligation. A provision is measured using

the cash flows estimated to settle the present obligation.

When some or all of the economic benefits required to settle a provision are expected to be recovered from

a third party, a receivable is recognized as an asset if it is virtually certain that reimbursement will be

received and the amount of the receivable can be measured reliably.

Recognition of Revenue

Interest revenue on loans is recorded on an accrual basis. Under the guidance of the FSC, no interest

revenue is recognized on loans that are classified as overdue loans. The interest revenue on these loans is

recognized upon collection of the loans and credits.

Service fees are recognized when a major part of the earnings process is completed and cash is collected.

Dividend income from investments is recognized when the stockholder’s right to receive payment has been

established (provided that it is probable that the economic benefits will flow to the Bank and the amount of

income can be measured reliably).

- 31 -

Service that results in award credits for customers, under the Bank’s award scheme, is accounted for as

multiple element revenue transactions and the fair value of the consideration received or receivable is

allocated between the service rendered and the award credits granted. The consideration allocated to the

award credits is measured by reference to their fair value. Such consideration is not recognized as revenue

at the time of the initial sale transaction but is deferred and recognized as revenue when the award credits

are redeemed and the Bank’s obligations have been fulfilled.

Employee Benefits

Short-term employee benefits

Short-term and non-discounted employee benefits are recognized as expenses in the current year as services

are rendered.

Retirement benefits

Payments to defined contribution retirement benefit plans are recognized as an expense when employees

have rendered service entitling them to the contributions.

Defined benefit costs (including service cost, net interest and remeasurement) under the defined benefit

retirement benefit plans are determined using the projected unit credit method. Service cost and net

interest on the net defined benefit liability (asset) are recognized as employee benefits expense in the period

they occur. Remeasurement, comprising actuarial gains and losses and the return on plan assets

(excluding interest), is recognized in other comprehensive income in the period in which they occur.

Remeasurement recognized in other comprehensive income is reflected immediately in retained earnings

and will not be reclassified to profit or loss.

Net defined benefit liability (asset) represents the actual deficit (surplus) in the Bank’s defined benefit plan.

Any surplus resulting from this calculation is limited to the present value of any refunds from the plans or

reductions in future contributions to the plans.

Preferential interest deposits for employees

The Bank provides preferential interest deposits to current and retired employees, and these deposits,

including payments of the preferential interest deposits, are within certain amounts. The preferential rates

for employees’ deposits in excess of market rate should be treated as employee benefits.

Under the Guidelines Governing the Preparation of Financial Reports by Public Banks, the Bank should

follow the requirement of IAS 19 “Employee Benefits” endorsed by FSC to determine the excess interest

on the preferential interest deposits of retired employees by applying an actuarial valuation method when

the employees retire. The actuarial assumptions should be in accordance with the requirements set by the

authorities.

Termination benefits

A liability for a termination benefit is recognized at the earlier of when the Bank can no longer withdraw

the offer of the termination benefit and when the Bank recognizes any related restructuring costs.

Share-based Payment

The Bank’s employees subscribed for the reserved shares of Taiwan Cooperative Financial Holding

Company, Ltd. (TCFHC) in accordance with the Financial Holding Company Act, and the Bank recognized

the fair value of the stock options under salary expenses and under capital surplus for share-based payment

on the grant date, i.e., the date when the Bank and its employees made an agreement for the employees to

subscribe for TCFHC’s shares.

- 32 -

Taxation

Income tax expense represents the sum of the tax currently payable and deferred tax.

Current tax

According to the Income Tax Law, an additional tax at 10% of unappropriated earnings is provided for as

income tax in the year the stockholders approve to retain the earnings.

Adjustments of prior years’ tax liabilities are added to or deducted from the current year’s tax provision.

Deferred tax

Deferred tax is recognized on temporary differences between the carrying amounts of assets and liabilities

in the financial statements and the corresponding tax bases used in the computation of taxable profit.

Deferred tax liabilities are generally recognized for all taxable temporary differences. Deferred tax assets

are generally recognized for all deductible temporary differences and unused loss carryforwards to the

extent that it is probable that taxable profits will be available against which these deductible temporary

differences can be used. If the temporary difference arises from the initial recognition (other than in a

business combination) of assets and liabilities in a transaction that affects neither the taxable profit nor the

accounting profit, the resulting deferred tax asset or liability is not recognized. In addition, a deferred tax

liability is not recognized on taxable temporary difference arising from the initial recognition of goodwill.

Deferred tax liabilities are recognized for taxable temporary differences associated with investments in

subsidiaries and associates, and interests in joint ventures, except where the Bank is able to control the

reversal of the temporary difference and it is probable that the temporary difference will not reverse in the

foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such

investments and interests are only recognized to the extent that it is probable that there will be sufficient

taxable profits against which to use the benefits of the temporary differences and these differences are

expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed each balance sheet date and reduced to the extent

that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to

be recovered. A previously unrecognized deferred tax asset is also reviewed each balance sheet date and

recognized to the extent that it has become probable that future taxable profit will allow the deferred tax

asset to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in

which the asset realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or

substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and

assets reflects the tax consequences based on the manner in which the Bank expects, at the end of the

reporting period, to recover or settle the carrying amount of its assets and liabilities.

Current and deferred tax for the year

Current and deferred taxes are recognized in profit or loss, except when they relate to items that are

recognized in other comprehensive income or directly in equity, in which case, the current and deferred tax

are also recognized in other comprehensive income or directly in equity, respectively. Where current tax

or deferred taxes arises from the initial accounting for a business combination, the tax effect is included in

the accounting for the business combination.

TCFHC and its subsidiaries elected to file consolidated tax returns for periods starting in 2012. However,

since the Bank applied the accounting treatment mentioned in the preceding paragraph to income tax, any

distribution of cash payments and receipts among the consolidated group members is recorded as current

tax assets or current tax liabilities.

- 33 -

Business Combination

Acquisitions of businesses are accounted for using the acquisition method. Acquisition-related costs are

generally recognized as expense as incurred.

Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of the

acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date

amounts of the identifiable assets acquired and the liabilities assumed.

Business combination involving entities under common control is not accounted for by acquisition method

but accounted for at the carrying amounts of the entities. Prior period comparative information in the

financial statements is restated as if a business combination involving entities under common control had

already occurred in that period.

5. CRITICAL ACCOUNTING JUDGMENTS AND KEY SOURCES OF ESTIMATION

UNCERTAINTY

In the application of the Bank’s accounting policies, which are described in Note 4, the Bank’s management

is required to make judgments, estimates and assumptions about the carrying amounts of assets and

liabilities that are not readily apparent from other sources. The estimates and associated assumptions are

based on historical experience and other factors that are considered relevant. Actual results may differ

from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting

estimates are recognized in the year in which the estimate is revised if the revision affects only that year or

in the year of the revision and future periods if the revision affects both current year and future periods.

Unless stated in other notes, the following are the critical judgments, assumptions and estimation

uncertainty estimations that the Bank’s management has made in the process of applying the Bank’s

accounting policies and that have the most significant effect on the amounts recognized in the financial

statements:

a. Impairment losses on loans

The Bank monthly assesses loans collectively. When determining whether an impairment loss should

be recognized, the Bank mainly seeks for observable evidence that indicates impairment. Objective

evidence of impairment of a portfolio of loans and receivables could include the Bank’s past difficulty

in collecting payments and an increase in the number of delayed payments, as well as observable

changes in national or local economic conditions that correlate with defaults on loans and receivables.

The management uses past loss experience on assets that have similar credit risk characteristics to

estimate the expected future cash flows. The Bank reviews the methods and assumptions of cash flow

estimation regularly to eliminate the difference between expected and actual loss.

b. Fair values of financial instruments

Fair values of financial instruments in an inactive market or with no quoted market prices are

determined by valuation techniques. Under these circumstances, fair values are derived from

observable market data of other similar financial assets. When there are no observable inputs in the

market, the fair values of financial instruments are estimated by making appropriate assumptions. The

Bank applies appropriate valuation models to determine the fair values of financial instruments

subjective to valuation techniques. All models are fine-tuned to ensure the valuation results fairly

reflect actual market information and prices. The Bank’s management believes that the chosen

valuation techniques and assumptions used are appropriate in determining the fair value of financial

instruments.

- 34 -

For the fair value determination of financial instruments, refer to Note 38 to the financial statements.

c. Income tax

The Bank assesses income tax based on the calculation of taxable income earned from domestic and

foreign sources. The assessment of tax on both domestic and foreign sourced income requires

summarizing, analyzing and calculating of multiple transactions. When the final tax amount differs

from the amount originally recognized, the difference affects the recognition of both current and

deferred income tax. In addition, the realizability of deferred tax assets mainly depends on whether

sufficient future profits or taxable temporary differences will be available. In cases where the actual

future profits generated are less than expected, a material reversal of deferred tax assets may arise,

which would be recognized in profit or loss for the period in which such a reversal takes place.

d. Employment benefits

The calculation of the present value of post-employment benefits and preferential rates for retired

employees’ deposits is based on the actuarial result under several assumptions. Any change in these

assumptions may affect the carrying amount of post-employment benefits and preferential rates interest

deposits plan for retired employees.

One of the estimates used for determining the net pension costs (revenues) is discount rate. The Bank

determines appropriate discount rates at the end of each year and estimates the present values of future

cash outflows resulting from fulfilling the post-employment obligation by the discount rates. To better

determine the discount rates, the Bank takes into account the interest rates of high-quality corporate

bonds or government bonds, with currencies the same as those of post-employment benefit payments,

and with durations that match those of the corresponding pension liabilities.

Other significant assumptions for post-employment obligation are subject to current market condition.

Significant assumptions for the obligation of preferential interest deposits for retired employee are

determined by the authorities.

e. Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the

cash-generating units to which goodwill has been allocated. The value in use calculation requires

management to estimate the future cash flows expected to arise from the cash-generating unit and a

suitable discount rate in order to calculate present value. Where the actual future cash flows are less

than expected, a material impairment loss may arise.

f. Impairment assessment of available-for-sale equity investment

Objective evidences of the impairment of an available-for-sale equity investment include the fair value

of that investment falling significantly or constantly below the cost. Subjective judgments are required

when assessing the impairment. The Bank’s management considers past market fluctuation, historical

prices of the investment and other factors that affect the performance of the industries to which the

investees belong to make the subjective judgments.

g. The valuation of provision for financial guarantee contracts

Except for the minimum standards under certain laws, the Bank’s main basis for deciding the amounts

of provisions is whether there is any observable evidence that the Bank has payment obligations to

compensate the losses of guarantee holders. The Bank regularly reviews the economic situation in

terms of defaults on debt repayments to reduce the difference between the estimated and the actual

amounts of loss.

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6. CASH AND CASH EQUIVALENTS

December 31

2017 2016

Cash on hand $ 22,458,545 $ 21,107,244

Notes and checks in clearing 23,198,709 21,179,639

Due from banks 17,905,201 11,777,943

$ 63,562,455 $ 54,064,826

Reconciliations of cash and cash equivalents between the statements of cash flows and the balance sheets as

of December 31, 2017 and 2016 are shown in the statements of cash flows.

7. DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS

December 31

2017 2016

Reserves for deposits - account A $ 36,817,723 $ 34,750,975

Reserves for deposits - account B 68,849,178 67,264,263

Reserves for deposits - community financial institutions 56,667,002 54,742,220

Reserves for deposits - foreign-currency deposits 370,594 354,002

Deposits in the Central Bank 39,200,000 39,200,000

Negotiable certificates of deposit in the Central Bank 800,000 1,435,000

Due from the Central Bank - others 10,732,126 8,958,457

Due from the Central Bank - central government agencies’ deposits 2,498,012 4,246,259

Call loans to banks 58,406,917 91,066,262

$ 274,341,552 $ 302,017,438

The deposit reserves are determined monthly at prescribed rates based on the average balances of various

types of deposit accounts held by the Bank. The deposit reserves are subject to withdrawal restrictions,

but deposit reserve - account A and foreign-currency deposit reserves may be withdrawn anytime.

Under the guideline issued by the Central Bank of the Republic of China (CBC), the Bank should deposit

60 percent of the deposits of central government agencies in the CBC, and the deposits are subject to

withdrawal restrictions.

8. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS

December 31

2017 2016

Held-for-trading financial assets

Commercial paper $ 8,348,633 $ 18,918,778

Listed stocks 1,078,689 902,142

Corporate bonds 755,666 753,787

Convertible bonds 136,488 -

Government bonds - 3,741,272

Currency swap contracts 2,089,967 3,122,206

(Continued)

- 36 -

December 31

2017 2016

Interest rate swap contracts $ 158,184 $ -

Forward contracts 116,003 256,258

Foreign-currency margin contracts 112,946 81,509

Futures exchange margins 26,197 3,736

Cross-currency swap contracts 21,764 13,294

Currency option contracts - buy 18,306 73,155

Financial assets at fair value through profit or loss $ 12,862,843 $ 27,866,137

Held-for-trading financial liabilities

Currency swap contracts $ 2,701,991 $ 1,809,972

Currency option contracts - sell 18,304 74,734

Interest rate swap contracts 16,021 234,441

Cross-currency swap contracts 15,108 15,078

Forward contracts 10,907 160,751

Foreign-currency margin contracts 229 -

2,762,560 2,294,976

Financial liabilities designated as at fair value through profit or loss

Bank debentures (Note 24) 11,688,291 12,336,035

Financial liabilities at fair value through profit or loss $ 14,450,851 $ 14,631,011

(Concluded)

As of December 31, 2017 and 2016, financial assets at fair value through profit or loss amounting to

$3,050,092 thousand and $4,500,805 thousand, respectively, had been sold under repurchase agreements.

The Bank enters into derivative transactions mainly to accommodate customers’ needs and to manage its

exposure to adverse changes in exchange rates and interest rates. The Bank’s strategy for hedging against

risk is to reduce most of the market price risk or cash flow risk.

As of December 31, 2017 and 2016, the contract (notional) amounts of derivative transactions of Bank were

as follows:

December 31

2017 2016

Currency swap contracts $ 389,028,378 $ 386,643,205

Interest rate swap contracts 16,987,717 14,928,007

Forward contracts 10,061,815 21,618,774

Currency option contracts - sell 4,936,507 6,939,285

Currency option contracts - buy 4,936,507 6,718,188

Cross-currency swap contracts 1,910,603 1,387,092

Foreign-currency margin contracts 1,555,713 1,162,522

- 37 -

As of December 31, 2017, the open position of futures transactions of the Bank were as follows:

December 31, 2017

Contract

Open Position

Amounts or

Premium

Items Products Buy/Sell

Number of

Contracts

Paid

(Charged) Fair Values

Futures contracts TAIEX Futures 201801 Sell 10 $ 21,050 $ 21,266

10-Year U.S. Treasury

Note Futures 201803

Sell 30 110,808 110,270

9. SECURITIES PURCHASED UNDER RESELL AGREEMENTS

Securities acquired for $249,463 thousand under resell agreements as of December 31, 2017, will

subsequently be sold for $249,533 thousand.

10. RECEIVABLES, NET

December 31

2017 2016

Accrued interest $ 7,521,346 $ 6,396,248

Acceptances 4,119,715 3,289,300

Credit cards 3,214,061 2,932,579

Accounts receivable factored without recourse 1,843,856 561,785

Receivable from merchant accounts in credit cards business 1,031,825 693,721

Credits receivable 463,578 468,946

Accounts receivable 445,631 532,904

Refundable deposits receivable in leasehold agreements 183,993 272,993

Receivable on securities 153,075 94,877

Others 347,745 269,028

19,324,825 15,512,381

Less: Allowance for possible losses 731,243 703,687

$ 18,593,582 $ 14,808,694

Credits receivable due to the merger with the Farmers Bank of China on May 1, 2006 were recognized at

fair value of credits written off by the Farmers Bank of China in the past. The fair values were evaluated

by PricewaterhouseCoopers Financial Advisory Service Co., Ltd.

- 38 -

The allowances for possible losses on receivables (except spot exchange receivable - foreign currencies,

which amounted to $21 thousand and $0 thousand, respectively) assessed for impairment as of December

31, 2017 and 2016 were as follows:

Items

December 31, 2017 December 31, 2016

Receivables Allowance for

Possible Losses Receivables

Allowance for

Possible Losses

With objective

evidence of

impairment

Assessment of

individual

impairment

$ 854,629 $ 595,821 $ 963,217 $ 558,168

Assessment of

collective

impairment

116,033 31,979 115,996 37,125

With no objective

evidence of

impairment

Assessment of

collective

impairment

18,354,142 103,443 14,433,168 78,394

Total 19,324,804 731,243 15,512,381 703,687

The changes in allowance for possible losses are summarized below:

For the Year Ended December 31

2017 2016

Balance, January 1 $ 703,687 $ 596,764

Provision for possible losses 168,772 123,594

Write-offs (143,049) (17,110)

Recovery of written-off receivables 5,059 661

Effects of exchange rate changes (3,226) (222)

Balance, December 31 $ 731,243 $ 703,687

11. DISCOUNTS AND LOANS, NET

December 31

2017 2016

Bills discounted $ 1,446,384 $ 1,624,550

Overdraft

Unsecured 136,988 144,492

Secured 63,885 89,017

Import and export negotiations 663,775 581,716

Short-term loans

Unsecured 249,778,666 222,846,953

Accounts receivable financing 869,022 560,979

Secured 190,622,135 174,550,850

Medium-term loans

Unsecured 296,049,415 290,839,159

Secured 299,366,082 309,946,717

(Continued)

- 39 -

December 31

2017 2016

Long-term loans

Unsecured $ 27,915,371 $ 29,959,231

Secured 946,289,312 944,395,557

Overdue loans 6,075,410 6,768,785

2,019,276,445 1,982,308,006

Less: Allowance for possible losses 25,040,509 23,347,544

Less: Adjustment of discount 416,502 452,050

$ 1,993,819,434 $ 1,958,508,412

(Concluded)

As of December 31, 2017 and 2016, accrual of interest on the above overdue loans had stopped. Thus, the

unrecognized interest revenue was $138,512 thousand and $118,803 thousand in 2017 and 2016,

respectively, based on the average loan interest rate for the year.

The allowances for possible losses on discounts and loans assessed for impairment as of December 31,

2017 and 2016 were as follows:

Items

December 31, 2017 December 31, 2016

Discounts and

Loans

Allowance for

Possible Losses

Discounts and

Loans

Allowance for

Possible Losses

With objective

evidence of

impairment

Assessment of

individual

impairment

$ 19,115,109 $ 3,765,681 $ 18,864,113 $ 4,711,710

Assessment of

collective

impairment

11,295,185 1,910,062 10,715,491 1,817,649

With no objective

evidence of

impairment

Assessment of

collective

impairment

1,988,866,151 19,364,766 1,952,728,402 16,818,185

Total 2,019,276,445 25,040,509 1,982,308,006 23,347,544

The changes in allowance for possible losses are summarized below:


2017 2016

Balance, January 1 $ 23,347,544 $ 21,252,865

Provisions for possible losses 4,095,817 3,377,104

Write-offs (3,569,009) (3,630,920)

Recovery of written-off receivables 1,398,189 2,415,490

Effects of exchange rate and other changes (232,032) (66,995)

Balance, December 31 $ 25,040,509 $ 23,347,544

- 40 -

The details of bad-debt expenses and provision for losses on guarantees in 2017 and 2016 were as follows:


2017 2016

Provision for possible losses on discounts and loans $ 4,095,817 $ 3,377,104

Provision for possible losses on receivables 168,772 123,594

Provision for possible losses on overdue receivables 818,853 250,498

Provision for possible losses on guarantees 219,052 51,466

$ 5,302,494 $ 3,802,662

As of December 31, 2017 and 2016, The Bank was in compliance with the FSC-required provision for

credit assets.

12. AVAILABLE-FOR-SALE FINANCIAL ASSETS, NET

December 31

2017 2016

Government bonds $ 87,996,767 $ 75,321,048

Bank debentures 36,665,414 29,457,223

Corporate bonds 25,331,812 14,349,335

Listed stocks and emerging market stocks 4,316,380 4,230,764

Beneficiary certificates 131,123 282,576

$ 154,441,496 $ 123,640,946

The Bank evaluated its available-for-sale financial assets and recognized a reversal of impairment loss of

$3,221 thousand because of the change in credit rating of the bond issuer in 2016.

As of December 31, 2017 and 2016, available-for-sale financial assets amounting to $6,867,946 thousand

and $6,870,688 thousand, respectively, had been sold under repurchase agreements.

13. HELD-TO-MATURITY FINANCIAL ASSETS

December 31

2017 2016

Negotiable certificates of deposit in the Central Bank $ 402,675,000 $ 431,410,000

Government bonds 76,495,807 52,658,934

Corporate bonds 28,440,163 19,770,568

Bank debentures 5,902,331 5,410,938

Certificates of deposit 276,024 299,646

Treasury bills - 498,878

$ 513,789,325 $ 510,048,964

The Bank evaluated its held-to-maturity financial assets and recognized a reversal of impairment loss of

$7,895 thousand and $3,130 thousand on some bonds because of the change in credit ratings of the bond

issuers in 2017 and 2016, respectively.

- 41 -

14. INVESTMENTS ACCOUNTED FOR USING EQUITY METHOD

December 31

2017 2016

Investment in subsidiary $ 1,949,463 $ 1,760,886

Investment in associate 124,346 121,381

$ 2,073,809 $ 1,882,267

a. Investment in subsidiary

December 31

2017 2016

Amount

Percentage

of

Ownership Amount

Percentage

of

Ownership

United Taiwan Bank S.A $ 1,949,463 90.02 $ 1,760,886 90.02

b. Investment in associate

December 31

2017 2016

Amount

Percentage

of

Ownership Amount

Percentage

of

Ownership

United Real Estate Management Co.,

Ltd. $ 124,346 30.00 $ 121,381 30.00

Aggregate information of associate that is not individually material:


2017 2016

The Bank’s share of:

Net income $ 4,998 $ 5,383

Other comprehensive income 4,036 (299)

Total comprehensive income for the year $ 9,034 $ 5,084

The Bank received $6,069 thousand and $5,726 thousand dividends from United Real Estate Management

Co., Ltd. for the years ended December 31, 2017 and 2016, respectively. The dividends are recognized as

a reduction of investments accounted for using equity method.

The investments accounted for using equity method and the share of profit or loss and other comprehensive

income of the investments for the years ended December 31, 2017 and 2016 were based on the financial

statements audited by the auditors for the same years.

- 42 -

15. OTHER FINANCIAL ASSETS, NET

December 31

2017 2016

Overdue receivables $ 987,653 $ 593,863

Less: Allowance for possible losses 958,408 551,226

Overdue receivables, net 29,245 42,637

Debt instruments with no active market 82,438,716 78,619,317

Due from banks 20,145,645 17,133,396

Financial assets carried at cost 4,092,383 4,092,383

Call loans to securities firms 296,800 -

$ 107,002,789 $ 99,887,733

Debt instruments with no active market are summarized as follows:

December 31

2017 2016

Corporate bonds $ 67,217,840 $ 63,551,958

Bank debentures 15,220,876 15,067,359

$ 82,438,716 $ 78,619,317

Financial assets carried at cost are summarized as follows:

December 31

2017 2016

Amount

Percentage

of

Ownership Amount

Percentage

of

Ownership

Taiwan Asset Management Co., Ltd. $ 2,370,934 17.03 $ 2,370,934 17.03

Taipei Financial Center Corp. 669,600 1.63 669,600 1.63

Taiwan Power Company 631,153 0.24 631,153 0.24

Financial Information Service Co., Ltd. 135,405 2.89 135,405 2.89

Taiwan Financial Asset Service Co.,

Ltd. 101,125 5.88 101,125 5.88

Others 184,166 184,166

$ 4,092,383 $ 4,092,383

Management believed that the above equity investments held by the Bank have fair value that cannot be

reliably measured because the range of reasonable fair value estimates was so significant; therefore, they

were measured at cost less impairment at the end of reporting period.

Due from banks (part of other financial assets, net) held by the Bank were demand deposits and time

deposits could not be withdrawn and had maturity periods of more than three months and could not be used

before maturity.

- 43 -

16. PROPERTIES AND EQUIPMENT, NET

December 31

2017 2016

Carrying amount

Land $ 21,102,803 $ 24,325,945

Buildings 11,893,308 7,861,100

Machinery and equipment 519,325 689,312

Transportation equipment 90,089 92,258

Other equipment 113,111 101,008

Leasehold improvements 92,254 116,903

Leased assets 11,604 -

Prepayments for equipment, land and buildings and construction in

progress 104,269 4,776,321

$ 33,926,763 $ 37,962,847

Land Buildings

Machinery and

Equipment

Transportation

Equipment

Other

Equipment

Leasehold

Improvements Leased Assets Prepayments Total

Cost

Balance, January 1, 2017 $ 24,341,122 $ 14,409,984 $ 4,553,709 $ 618,973 $ 1,149,262 $ 816,725 $ - $ 4,776,321 $ 50,666,096

Additions 98,254 145,607 101,256 29,251 49,318 36,015 13,352 520,247 993,300

Disposals - (8,672 ) (375,535 ) (16,225 ) (69,094 ) (31,725 ) - - (501,251 )

Reclassification - 5,120,506 48,943 165 5,775 572 - (5,177,681 ) (1,720 )

Transferred to investment properties (3,321,179 ) (996,091 ) - - - - - - (4,317,270 )

Transferred to intangible assets - - - - - - - (14,618 ) (14,618 )

Effects of exchange rate changes (217 ) (460 ) (9,261 ) (1,462 ) (3,062 ) (12,707 ) - - (27,169 )

Balance, December 31, 2017 $ 21,117,980 $ 18,670,874 $ 4,319,112 $ 630,702 $ 1,132,199 $ 808,880 $ 13,352 $ 104,269 $ 46,797,368

Balance, January 1, 2016 $ 24,834,146 $ 14,648,512 $ 5,019,163 $ 623,196 $ 1,159,021 $ 817,062 $ - $ 4,789,767 $ 51,890,867

Additions - 17,221 51,234 15,953 30,188 20,523 - 84,747 219,866

Disposals - (860 ) (563,267 ) (21,194 ) (40,858 ) (21,872 ) - - (648,051 )

Reclassification - 19,973 49,009 1,470 1,654 3,320 - (83,063 ) (7,637 )

Transferred to investment

properties (492,967 ) (296,674 ) - - - - - - (789,641 ) Transferred from investment

properties - 21,931 - - - - - - 21,931

Transferred to intangible assets - - - - - - - (15,130 ) (15,130 )

Effects of exchange rate changes (57 ) (119 ) (2,430 ) (452 ) (743 ) (2,308 ) - - (6,109 )

Balance, December 31, 2016 $ 24,341,122 $ 14,409,984 $ 4,553,709 $ 618,973 $ 1,149,262 $ 816,725 $ - $ 4,776,321 $ 50,666,096

Land Buildings

Machinery and

Equipment

Transportation

Equipment

Other

Equipment

Leasehold

Improvements Leased Assets Total

Accumulated depreciation and impairment

Balance, January 1, 2017 $ 15,177 $ 6,548,884 $ 3,864,397 $ 526,715 $ 1,048,254 $ 699,822 $ - $ 12,703,249

Disposals - (8,435 ) (374,138 ) (16,207 ) (68,866 ) (31,725 ) - (499,371 )

Depreciation expenses - 430,747 318,928 32,337 40,547 51,626 1,748 875,933

Transferred to investment properties - (193,309 ) - - - - - (193,309 )

Effects of exchange rate changes - (321 ) (9,400 ) (2,232 ) (847 ) (3,097 ) - (15,897 )

Balance, December 31, 2017 $ 15,177 $ 6,777,566 $ 3,799,787 $ 540,613 $ 1,019,088 $ 716,626 $ 1,748 $ 12,870,605

Balance, January 1, 2016 $ 15,177 $ 6,302,337 $ 4,067,010 $ 513,598 $ 1,043,883 $ 657,267 $ - $ 12,599,272

Disposals - - (562,589 ) (21,174 ) (40,721 ) (21,872 ) - (646,356 )

Depreciation expenses - 370,717 361,913 36,382 45,761 65,248 - 880,021

Transferred to investment properties - (129,212 ) - - - - - (129,212 )

Transferred from investment properties - 5,115 - - - - - 5,115

Effects of exchange rate changes - (73 ) (1,937 ) (2,091 ) (669 ) (821 ) - (5,591 )

Balance, December 31, 2016 $ 15,177 $ 6,548,884 $ 3,864,397 $ 526,715 $ 1,048,254 $ 699,822 $ - $ 12,703,249

The Bank revalued its properties five times in 1979, 1998, 2007, 2011 and 2012. As December 31, 2017,

the reserve for land revaluation increment tax (part of deferred tax liabilities) was $2,596,230 thousand.

Properties and equipment are depreciated on the straight-line method over service lives estimated as

follows:

Buildings

Main buildings 50 years

Equipment installed in buildings 10 to 15 years

Machinery and equipment 3 to 10 years

Transportation equipment 5 to 10 years

Other equipment 4 to 20 years

Leasehold improvements 3 to 5 years

Leased assets 7 years

- 44 -

As of December 31, 2016, the Bank’s prepayments for equipment, land and buildings and construction in

progress pertained to the construction of the head office. Constructions of the head office have been

completed and accepted in 2017, and the property under construction has been transferred to accounting

items such as buildings.

In testing assets for impairment, the Bank defined each operating unit or operating segment as a

cash-generating unit (CGU). The recoverable amount of a CGU was determined at its value in use for the

properties and equipment. The discount rates for the CGUs’ value in use were 9.34% and 8.84% as of

December 31, 2017 and 2016, respectively.

17. INVESTMENT PROPERTIES, NET

December 31

2017 2016

Land $ 5,568,323 $ 2,247,144

Buildings 1,416,086 639,219

$ 6,984,409 $ 2,886,363

Land Buildings Total

Cost

Balance, January 1, 2017 $ 2,247,144 $ 1,062,523 $ 3,309,667

Transferred from properties and equipment 3,321,179 996,091 4,317,270

Balance, December 31, 2017 $ 5,568,323 $ 2,058,614 $ 7,626,937

Balance, January 1, 2016 $ 1,754,257 $ 793,051 $ 2,547,308

Disposals (80) (5,271) (5,351)

Transferred from properties and equipment 492,967 296,674 789,641

Transferred to properties and equipment - (21,931) (21,931)

Balance, December 31, 2016 $ 2,247,144 $ 1,062,523 $ 3,309,667

Accumulated depreciation and impairment

Balance, January 1, 2017 $ - $ 423,304 $ 423,304

Depreciation expenses - 25,915 25,915

Transferred from properties and equipment - 193,309 193,309

Balance, December 31, 2017 $ - $ 642,528 $ 642,528

Balance, January 1, 2016 $ - $ 277,808 $ 277,808

Depreciation expenses - 22,955 22,955

Disposal - (1,556) (1,556)


Transferred to properties and equipment - (5,115) (5,115)

Balance, December 31, 2016 $ - $ 423,304 $ 423,304

Investment properties (except for land) are depreciated through 50 years on a straight-line basis.

- 45 -

As of December 31, 2017 and 2016, the fair value of investment properties was $21,128,687 thousand and

$7,738,382 thousand, respectively. The fair value was determined through calculations using the market

value method.

The revenues generated from the investment properties are summarized as follows:


2017 2016

Rental income from investment properties $ 216,874 $ 171,737

Direct operating expenses for investment properties that generate

rental income (61,962) (48,088)

$ 154,912 $ 123,649

18. INTANGIBLE ASSETS

December 31

2017 2016

Goodwill $ 3,170,005 $ 3,170,005

Computer software 343,487 375,307

$ 3,513,492 $ 3,545,312

Goodwill

Computer

Software Total

Balance, January 1, 2017 $ 3,170,005 $ 375,307 $ 3,545,312

Separate acquisition - 111,389 111,389

Amortization expenses - (156,147) (156,147)


Effect of exchange rate changes - (1,680) (1,680)

Balance, December 31, 2017 $ 3,170,005 $ 343,487 $ 3,513,492

Balance, January 1, 2016 $ 3,170,005 $ 458,901 $ 3,628,906

Separate acquisition - 75,452 75,452

Amortization expenses - (172,959) (172,959)


Effect of exchange rate changes - (1,217) (1,217)

Balance, December 31, 2016 $ 3,170,005 $ 375,307 $ 3,545,312

The computer software with limited useful life is amortized on a straight-line basis over the useful life of 5

years.

In testing assets for impairment, the Bank defined each operating unit or operating segment as a

cash-generating unit (CGU). The recoverable amount of a CGU was determined at its value in use for the

goodwill impairment test. The discount rates for the CGUs’ value in use were 9.34% and 8.84% as of


Goodwill resulting from merger of the Bank with the Farmers Bank of China was allocated to operating

units or operating segment (cash-generating units with allocated goodwill). There was no impairment loss

on goodwill as of December 31, 2017 and 2016.

- 46 -

19. OTHER ASSETS

December 31

2017 2016

Refundable deposits $ 291,328 $ 388,230

Prepaid expenses 254,752 262,449

Operating deposits 48,000 48,000

Others 12,439 12,452

$ 606,519 $ 711,131

20. DUE TO THE CENTRAL BANK AND OTHER BANKS

December 31

2017 2016

Due to banks $ 123,632,527 $ 127,053,225

Call loans from banks 78,964,960 83,018,325

Bank overdraft 5,355,483 9,482,741

Deposits from Chunghwa Post Co., Ltd. 3,920,100 5,815,108

Due to the Central Bank 426,995 299,512

$ 212,300,065 $ 225,668,911

21. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

Securities sold for $10,377,142 thousand and $12,000,831 thousand under repurchase agreements as of

December 31, 2017 and 2016, respectively, would subsequently be purchased for $10,382,135 thousand

and $12,006,077 thousand, respectively.

22. PAYABLES

December 31

2017 2016

Checks for clearing $ 23,198,709 $ 21,179,639

Accrued interest 4,388,767 3,752,969

Accrued expenses 4,289,330 4,253,905

Acceptances 4,147,242 3,396,401

Collections payable 4,143,416 5,886,095

Collections of notes and checks for various financial institutions in

other cities 627,378 1,441,353

Tax payable 488,463 457,468

Payables on notes and checks collected for others 257,935 533,563

Dividends payable 170,524 170,524

Factored accounts payable 107,321 385,123

Payable on securities 90,526 688,648

Others 3,270,018 1,974,537

$ 45,179,629 $ 44,120,225

- 47 -

23. DEPOSITS AND REMITTANCES

December 31

2017 2016

Deposits

Checking $ 46,935,009 $ 46,844,220

Demand 526,285,176 481,256,965

Savings - demand 805,892,649 796,973,550

Time 490,679,464 477,016,603

Negotiable certificates of deposit 12,392,500 1,622,800

Savings - time 647,817,790 669,211,936

Treasury 93,750,404 90,797,579

Remittances 845,343 433,539

$ 2,624,598,335 $ 2,564,157,192

24. BANK DEBENTURES

December 31

2017 2016

First subordinated bonds in 2010: The bank’s floating interest rate

for 1-year time deposit plus 0.25%; maturity - June 21, 2017 $ - $ 8,000,000

Second subordinated bonds in 2010, Type A: Reuters’ fixing rate

for 90 day’s New Taiwan dollar commercial paper refers to the

Taipei Interbank Offered Rate (TAIBOR) plus 0.15%; maturity -

October 25, 2017 - 3,000,000

Second subordinated bonds in 2010, Type B: Fixed rate of 1.45%;

maturity - October 25, 2017 - 1,000,000

First subordinated bonds in 2011, Type A: Reuters’ fixing rate for

90 day’s New Taiwan dollar commercial paper refers to the

TAIBOR plus 0.15%; maturity - May 25, 2018 7,300,000 7,300,000

First subordinated bonds in 2011, Type B: Fixed rate of 1.65%;

maturity - May 25, 2018 2,700,000 2,700,000

Second subordinated bonds in 2011, Type A: Reuters’ fixing rate


TAIBOR plus 0.25%; maturity - July 28, 2018 1,200,000 1,200,000


maturity - July 28, 2018 3,410,000 3,410,000

First subordinated bonds in 2012: Fixed rate of 1.65%; maturity -

June 28, 2022 11,650,000 11,650,000

Second subordinated bonds in 2012, Type A: Fixed rate of 1.43%;

maturity - December 25, 2019 1,000,000 1,000,000


maturity - December 25, 2022 7,350,000 7,350,000

First subordinated bonds in 2013, Type A: Reuters’ fixing rate for

90 day’s New Taiwan dollar commercial paper refers to the

TAIBOR plus 0.43%; maturity - March 28, 2020 4,000,000 4,000,000


maturity - March 28, 2020 3,500,000 3,500,000

Second subordinated bonds in 2013, Type A: Fixed rate of 1.72%;

maturity - December 25, 2020 900,000 900,000

(Continued)

- 48 -

December 31

2017 2016

Second subordinated bonds in 2013, Type B: Reuters’ fixing rate


TAIBOR plus 0.45%; maturity - December 25, 2023 $ 4,600,000 $ 4,600,000

First subordinated bonds in 2014, Type A: Fixed rate of 1.70%;

maturity - May 26, 2021 1,500,000 1,500,000


maturity - May 26, 2024 2,700,000 2,700,000

First subordinated bonds in 2014, Type C: Fixing rate for 90 day’s

New Taiwan dollar commercial paper refers to the Taiwan Bills

Index Rate 02 plus 0.43%; maturity - May 26, 2024 5,800,000 5,800,000


maturity - September 26, 2023 950,000 950,000


maturity - September 26, 2026 4,050,000 4,050,000


maturity - September 26, 2024 600,000 -


maturity - September 26, 2027 1,400,000 -

$ 64,610,000 $ 74,610,000

(Concluded)

To expand its long-term USD capital, the Bank applied for the issuance of unsecured bank debentures

amounting to US$1,000,000 thousand. The application was approved by the Financial Supervisory

Commission (FSC) on January 22, 2015. The Bank issue unsecured bank debentures with an aggregate

face value of US$400,000 thousand, consisting of type A bonds worth US$300,000 thousand with 0%

interest rate and type B bonds worth US$100,000 thousand with 0% interest rate; the Bank may exercise its

redemption rights at an agreed price after two years and three years, respectively, from the issue dates. If

the Bank do not exercise its redemption rights during issue period, all unsecured bank debentures will be

refunded on settlement date, March 30, 2045. To lower exposure to adverse changes in interest rates, the

Bank enters into interest rate swap contracts measured at fair value through profit or loss and to eliminate a

measurement or recognition inconsistency, the unsecured bank debentures are reclassified as designated as

at FVTPL upon initial recognition. They were as follows:

December 31

2017 2016

Unsecured bank debentures bonds issued in 2015, Type A $ 8,766,846 $ 9,253,296

Unsecured bank debentures bonds issued in 2015, Type B 2,921,445 3,082,739

$ 11,688,291 $ 12,336,035

The Bank has been approved by the FSC to issue unsecured subordinated bonds amounting to $6,000,000

thousand on May 18, 2017. As of December 31, 2017, the amount of unissued unsecured subordinated

bonds was $4,000,000 thousand.

- 49 -

25. OTHER FINANCIAL LIABILITIES

December 31

2017 2016

Structured products - host contracts $ 2,133,279 $ 1,208,004

Guarantee deposits received 1,557,688 1,051,443

Appropriation for loans 46,770 354,678

Lease payable 11,808 -

$ 3,749,545 $ 2,614,125

26. PROVISIONS

December 31

2017 2016

Provision for employee benefits

Net defined benefit liability $ 2,727,448 $ 2,531,665

Present value of retired employees’ preferential interest deposits

obligation 4,008,321 3,970,127

6,735,769 6,501,792

Provision for losses on guarantees 888,428 669,886

$ 7,624,197 $ 7,171,678

27. EMPLOYEE BENEFITS PLAN

a. Defined contribution plan

The pension plan under the Labor Pension Act (the Act) is a defined contribution plan. Based on the

Act, the Bank’s monthly contributions to individual pension accounts of employees covered by the

defined contribution plan is at 6% of monthly salaries and wages. The funds are deposited in

individual labor pension accounts at the Bureau of Labor Insurance.

The Bank recognized expense of $126,777 thousand and $120,402 thousand in the statement of

comprehensive income in 2017 and 2016, respectively in accordance with the defined contribution plan.

b. Defined benefit plan

The defined benefit plan adopted by the Bank in accordance with the Labor Standards Law is operated

by the government. Pension benefits are calculated on the basis of the length of service and average

monthly salaries of the six months before retirement. The Bank contributes amounts equal to 15% of

total monthly salaries and wages to a pension fund administered by the pension fund monitoring

committee. The pension fund is managed by the Bureau of Labor Funds, Ministry of Labor (the

Bureau); the Bank has no right to influence the investment policy and strategy. Pension contributions

are deposited in the Bank of Taiwan in the committee’s name. Before the end of each year, the Bank

assesses the balance in the pension fund. If the amount of the balance in the pension fund is

inadequate to pay retirement benefits for employees who conform to retirement requirements in the next

year, the Bank is required to fund the difference in one appropriation that should be made before the

end of March of the next year.

- 50 -

The amounts included in the balance sheets in respect of the Bank’s defined benefit plans were as

follows:

December 31

2017 2016

Present value of defined benefit obligation $ 12,724,492 $ 12,363,665

Fair value of plan assets (9,997,044) (9,832,000)

Net defined benefit liability $ 2,727,448 $ 2,531,665

Movements in net defined benefit liability were as follows:

Present Value

of the Defined

Benefit

Obligation

Fair Value of

the Plan Assets

Net Defined

Benefit

Liability

Balance at January 1, 2016 $ 11,800,882 $ (7,142,748) $ 4,658,134

Service cost

Current service cost 851,311 - 851,311

Net interest expense (income) 157,828 (114,323) 43,505

Recognized in profit or loss 1,009,139 (114,323) 894,816

Remeasurement

Return on plan assets (excluding amounts

included in net interest) - 50,490 50,490

Actuarial loss - changes in financial

assumptions 64,421 - 64,421

Actuarial gain - experience adjustments (68,322) - (68,322)

Recognized in other comprehensive income (3,901) 50,490 46,589

Contributions from the employer - (3,067,874) (3,067,874)

Benefits paid (442,455) 442,455 -

Balance at December 31, 2016 12,363,665 (9,832,000) 2,531,665

Service cost

Current service cost 820,277 - 820,277

Net interest expense (income) 148,120 (120,602) 27,518

Recognized in profit or loss 968,397 (120,602) 847,795

Remeasurement

Return on plan assets (excluding amounts

included in net interest) - 26,659 26,659

Actuarial loss - changes in financial

assumptions 256,168 - 256,168

Actuarial loss - experience adjustments 66,136 - 66,136

Recognized in other comprehensive income 322,304 26,659 348,963

Contributions from the employer - (1,000,975) (1,000,975)

Benefits paid (929,874) 929,874 -

Balance at December 31, 2017 $ 12,724,492 $ (9,997,044) $ 2,727,448

Through the defined benefit plans under the Labor Standards Law, the Bank is exposed to the following

risks:

1) Investment risk: The plan assets are invested in domestic/and foreign/equity and debt securities,

bank deposits, etc. The investment is conducted at the discretion of the Bureau or under the

mandated management. However, in accordance with relevant regulations, the return generated by

plan assets should not be below the interest rate for a 2-year time deposit with local banks.

- 51 -

2) Interest risk: A decrease in the government bond interest rate will increase the present value of the

defined benefit obligation; however, this will be partially offset by an increase in the return on the

plan’s debt investments.

3) Salary risk: The present value of the defined benefit obligation is calculated by reference to the

future salaries of plan participants. As such, an increase in the salary of the plan participants will

increase the present value of the defined benefit obligation.

The actuarial valuations of the present value of the defined benefit obligation were carried out by

qualified actuaries. The significant assumptions used for the purposes of the actuarial valuations were

as follows:

December 31

2017 2016

Discount rate(s) 1.10% 1.30%

Expected rate(s) of salary increase 2.00% 2.00%

Expected rate(s) of return on plan asset 1.10% 1.30%

Assuming a possible reasonable change in each of the significant actuarial assumptions and all other

assumptions remaining constant, the present value of the defined benefit obligation would have

increased (decreased) as follows:

December 31

2017 2016

Discount rate(s)

0.25% increase $ (318,994) $ (317,116)

0.25% decrease $ 331,506 $ 329,843

Expected rate(s) of salary increase

0.25% increase $ 314,089 $ 313,518

0.25% decrease $ (304,032) $ (303,191)

The sensitivity analysis presented above shows the effect on the present value of the defined benefit

obligations of a change in single assumption while all other assumptions remain unchanged. The

sensitivity analysis presented above might not be representative of the actual change in the present

value of the defined benefit obligation as it was unlikely that the change in assumptions would occur

independently of each other because some of the assumptions might be correlated.

December 31

2017 2016

The expected contributions to the plan for the next year $ 987,973 $ 927,134

The average duration of the defined benefit obligation 10.29 years 10.53 years

c. Employees’ preferential deposit plan

The Bank’s payment obligations on fixed-amount preferential interest deposits for retired employees

and current employees after retirement are in compliance with the Bank’s internal rules. Under the

Guidelines Governing the Preparation of Financial Reports by Public Banks, the Bank should determine

the excess interest from the preferential interest deposits of employees by applying an actuarial

valuation method when the employees retire.

- 52 -

The amounts included in the balance sheet arising from the Bank’s obligation in the employees’

preferential interest deposits plan were as follows:

December 31

2017 2016


obligation (part of provisions) $ 4,008,321 $ 3,970,127

The changes in present value of retired employees’ preferential interest deposits obligation were as

follows:


2017 2016


obligation, January 1 $ 3,970,127 $ 4,009,952

Interest expense 154,647 152,392

Actuarial losses 707,934 624,670

Benefits paid (824,387) (816,887)


obligation, December 31 $ 4,008,321 $ 3,970,127

Amounts recognized in profit or loss in employee preferential deposit plans for retired employees in the

statement of comprehensive income were as follows:


2017 2016

Interest expense $ 154,647 $ 152,392

Actuarial losses 707,934 624,670

Excessive interest of retired employees’ preferential interest

deposits $ 862,581 $ 777,062

Under Order No. 10110000850 issued by the Financial Supervisory Commission, effective March 15,

2012, the actuarial assumptions for calculating the expense for the retired employees’ preferential

interest deposit benefit are as follows:

December 31

2017 2016

Discount rate 4.00% 4.00%

Return on deposit 2.00% 2.00%

Account balance decrease rate per year 1.00% 1.00%

Rate of probability of change in the preferential deposit system 50.00% 50.00%

- 53 -

Assuming a possible reasonable change in each of the significant actuarial assumptions and all other

assumptions remaining constant, the present value of the retired employees’ preferential interest deposit

benefit obligation would have increased (decreased) as follows:

December 31

2017 2016

Discount rate(s)

1% increase $ (284,568) $ (285,210)

1% decrease $ 327,672 $ 328,890

Return on deposit

1% increase $ (837,761) $ (765,126)

1% decrease $ 837,761 $ 765,126

Account balance decrease rate per year

1% increase $ (300,762) $ (301,428)

1% decrease $ 341,798 $ 343,079

Rate of probability of change in the preferential deposit system

20% increase $ (1,603,328) $ (1,588,051)

20% decrease $ 1,603,328 $ 1,588,051

The sensitivity analysis presented above shows the effect on the present value of the retired employees’

preferential interest deposit benefit obligation of a change in single assumption while all other

assumptions remain unchanged. The sensitivity analysis presented above might not be representative

of the actual change in the present value of the retired employees’ preferential interest deposit benefit

obligation because it was unlikely that the change in assumptions would occur independently of each

other because some of the assumptions might be correlated.

28. NET INTEREST


2017 2016

Interest revenue

From discounts and loans $ 39,512,388 $ 39,554,733

From investments 8,253,067 6,094,278

From due from banks and call loans to other banks 2,307,591 3,602,820

Others 666,359 858,266

50,739,405 50,110,097

Interest expense

From deposits (15,772,469) (16,478,829)

From funds borrowing from the Central Bank and other banks (1,212,968) (646,697)

From subordinated bank debentures (940,562) (967,582)

From due to the Central Bank and other banks (426,043) (519,820)

From structure products (39,636) (26,965)

From securities sold under repurchase agreements (23,401) (34,304)

Others (25,629) (33,498)

(18,440,708) (18,707,695)

$ 32,298,697 $ 31,402,402

- 54 -

29. SERVICE FEE INCOME, NET


2017 2016

Service fee income

From insurance service $ 1,832,793 $ 2,778,901

From trust business 1,473,845 1,119,367

From loans 767,883 652,356

From guarantee 670,098 572,232

From credit cards 554,683 555,384

From remittance 311,440 317,548

From cross-bank transactions 268,095 252,459

From trust affiliated business 244,656 195,565

From import/export service 107,998 115,844

Others 551,690 511,566

6,783,181 7,071,222

Service charge

From cross-bank transactions (306,334) (278,749)

From credit cards (205,054) (194,469)

From credit cards acquiring (132,709) (120,298)

From custody (67,785) (50,002)

Others (146,407) (160,176)

(858,289) (803,694)

$ 5,924,892 $ 6,267,528

30. GAINS (LOSSES) ON FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH

PROFIT OR LOSS

For the Year Ended December 31, 2017

Interest

Revenue

(Expense)

Gain (Loss) on

Disposal

Loss on

Valuation

Dividend

Income Total

Held-for-trading financial assets $ 80,975 $ 9,639,346 $ (872,150) $ 14,787 $ 8,862,958

Held-for-trading financial liabilities - (9,490,555) (514,043) - (10,004,598)

Financial liabilities designated as at

fair value through profit or loss (545,865) - (336,172) - (882,037)

$ (464,890) $ 148,791 $ (1,722,365) $ 14,787 $ (2,023,677)


Interest

Revenue

(Expense)

Gain (Loss) on

Disposal

Gain (Loss) on

Valuation

Dividend

Income Total

Held-for-trading financial assets $ 101,383 $ 14,973,464 $ (867,159) $ 9,286 $ 14,216,974

Held-for-trading financial liabilities - (14,022,902) (298,962) - (14,321,864)

Financial liabilities designated as at

fair value through profit or loss (558,154) - 70,698 - (487,456)

$ (456,771) $ 950,562 $ (1,095,423) $ 9,286 $ (592,346)

- 55 -

31. EMPLOYEE BENEFITS, DEPRECIATION AND AMORTIZATION EXPENSES

a. Employee benefits expenses


2017 2016

Salaries $ 7,552,310 $ 7,652,957

Incentives 2,624,014 2,802,056

Excessive interest from preferential interest deposits 1,283,477 1,205,494

Post-employment benefits, termination benefits and

compensation 1,126,676 1,045,549

Overtime 397,510 394,757

Others 1,630,069 1,656,788

To comply with the Company Act amended in May 2015, the Bank’s board of directors amended its

Articles of Incorporation on March 28, 2016. Under the amended Articles, The Bank will distribute

employees’ compensation at percentages from 1% to 8% of its annual profit (pretax income which

exclude compensation of employees). However, the actual appropriation of the bonus should be made

only from the annual net income less any accumulated deficit. For the year ended December 31, 2017

and 2016, the compensation of employees was $836,689 thousand and $845,561 thousand, respectively,

based on the amended Company Act and the amended Articles.

Material differences between such estimated amounts and the amounts resolved by the board of

directors on or before the annual financial statements are authorized for issue are adjusted in the year

the compensation were recognized. If there is a change in the resolved amounts after the annual

financial statements are authorized for issue, the differences are recorded as a change in accounting

estimate.

The appropriations of employees’ compensation for 2017 and 2016 resolved by the board of directors

on March 23, 2018 and March 27, 2017, respectively, were as follows:


2017 2016

Employees’ compensation - cash $ 836,689 $ 845,561

There was no difference between the amounts of the employees’ compensation resolved by the board of

directors and the amount recognized in the financial statements.

Information on the employees’ compensation resolved by the Bank’s board of directors is available at

the Market Observation Post System website of the Taiwan Stock Exchange (http://emops.tse.com.tw).

b. Depreciation and amortization expenses


2017 2016

Depreciation expenses $ 901,848 $ 902,976

Amortization 156,177 173,000

- 56 -

32. INCOME TAX

a. Income tax recognized in profit or loss

Main components of income tax expense were as follows:


2017 2016

Current tax

Current year $ 2,341,180 $ 1,911,490

Prior year’s adjustments 1,715 (19,742)

2,342,895 1,891,748

Deferred tax

Current year (356,495) 130,884

Income tax expense recognized in profit or loss $ 1,986,400 $ 2,022,632

A reconciliation of accounting profit and current income tax expenses were as follows:


2017 2016

Income before income tax $ 14,885,594 $ 14,546,233

Income tax expense at the 17% statutory rate $ 2,530,551 $ 2,472,860

Nondeductible expenses in determining taxable income 892 1,729

Tax-exempt income (806,636) (731,422)

Unrecognized deductible temporary differences 19,307 21,234

Effect of different tax rate of overseas branches operating in

other jurisdictions 240,571 277,973

Adjustments for prior year’s tax 1,715 (19,742)

Income tax expense recognized in profit or loss $ 1,986,400 $ 2,022,632

In February 2018, it was announced by the President that the Income Tax Act in the ROC was amended

and, starting from 2018, the corporate income tax rate will be adjusted from 17% to 20%. In addition,

the rate of the corporate surtax applicable to 2017 unappropriated earnings will be reduced from 10% to

5%. Deferred tax assets and deferred tax liabilities recognized as at December 31, 2017 are expected

to be adjusted and would increase by $155,220 thousand in 2018.

b. Income tax recognized in other comprehensive loss (income)


2017 2016

Deferred tax

Recognized in other comprehensive income - items that may be

reclassified subsequently to profit or loss

Exchange differences on the translation of financial statements

of foreign operations $ (250,412) $ (34,521)

Unrealized gains on available-for-sale financial assets 1,563 577

Share of other comprehensive income of subsidiary accounted

for using the equity method 13,519 (16,964)

Total income tax recognized in other comprehensive income $ (235,330) $ (50,908)

- 57 -

c. Current tax assets and liabilities

December 31

2017 2016

Current tax assets

Tax receivable - consolidated tax return $ 1,071,039 $ 951,196

Tax refund receivable 287 55,229

Others 330,806 180,983

$ 1,402,132 $ 1,187,408

Current tax liabilities

Tax payable - consolidated tax return $ 560,958 $ 129,356

Tax payable 426,211 78,996

Others 198,727 120,023

$ 1,185,896 $ 328,375

d. Deferred tax assets and liabilities

Movements in deferred tax assets and liabilities were as follows:

For the year ended December 31, 2017

Opening

Balance

Recognized in

Profit or Loss

Recognized in

Other Com-

prehensive

Income

Closing

Balance

Deferred tax assets

Temporary differences

Financial instruments at fair value

through profit or loss $ - $ 40,905 $ - $ 40,905

Available-for-sale financial assets 3,877 - (1,628) 2,249

Properties and equipment 9,447 (548) - 8,899

Payable for annual leave 71,740 (2,213) - 69,527

Defined benefit obligation 26,069 (26,040) - 29

Employee’s preferential interest

deposits obligation 674,922 6,493 - 681,415

Other liabilities 5,220 (265) - 4,955

Exchanges difference on foreign

operations - - 217,549 217,549

Unrealized interests expense 163,696 92,798 - 256,494

$ 954,971 $ 111,130 $ 215,921 $ 1,282,022

Deferred tax liabilities



through profit or loss $ 267,748 $ (267,748) $ - $ -

(Continued)

- 58 -

Opening

Balance

Recognized in

Profit or Loss

Recognized in

Other Com-

prehensive

Income

Closing

Balance

Available-for-sale financial assets $ 65 $ - $ (65) $ -

Investments accounted for using

equity method 3,112 18,539 - 21,651

Intangible assets 364,322 - - 364,322

The reserve for land revaluation

increment tax 2,596,230 - - 2,596,230


operations 19,344 - (19,344) -

Others 10,343 3,844 - 14,187

$ 3,261,164 $ (245,365) $ (19,409) $ 2,996,390

(Concluded)


Opening

Balance

Recognized in

Profit or Loss

Recognized in

Other Com-

prehensive

Income

Closing

Balance

Deferred tax assets


Available-for-sale financial assets $ 5,218 $ - $ (1,341) $ 3,877


equity method 14,194 (14,194) - -

Properties and equipment 9,994 (547) - 9,447

Payable for annual leave 66,761 4,979 - 71,740

Defined benefit obligation 374,255 (348,186) - 26,069

Employee’s preferential interest

deposits obligation 681,692 (6,770) - 674,922

Other liabilities 6,355 (1,135) - 5,220

Unrealized interests expense 68,810 94,886 - 163,696

$ 1,227,279 $ (270,967) $ (1,341) $ $ 954,971

Deferred tax liabilities



through profit or loss $ 415,781 $ (148,033) $ - $ 267,748

Available-for-sale financial assets 829 - (764) 65


equity method - 3,112 - 3,112

Intangible assets 364,322 - - 364,322

The reserve for land revaluation

increment tax 2,596,230 - - 2,596,230


operations 70,829 - (51,485) 19,344

Others 5,505 4,838 - 10,343

$ 3,453,496 $ (140,083) $ (52,249) $ $ 3,261,164

- 59 -

e. Unused deductible temporary differences for which no deferred tax assets have been recognized in the

balance sheets

December 31

2017 2016

Deductible temporary differences $ 1,153,149 $ 804,185

f. Imputed tax credits are summarized as follows:

December 31

2017 2016

Balances of stockholders’ imputed tax credit $ 27,369 $ 30,914


2017 2016

Creditable ratio for distribution of earnings Note 0.34%

Note: Since the amended Income Tax Act announced in February 2018 abolished the imputation tax

system, related information for 2017 is not applicable.

g. Under the Income Tax Law, the unappropriated retained earnings of $19,985 thousand generated by the

Bank until December 31, 1997 were included in the unappropriated retained earnings as of December

31, 2017 and 2016.

h. The income tax returns of the Bank through 2011 had been examined by tax authorities. For the

Bank’s income tax returns (ITRs) from 2006 to 2011, the Taipei National Tax Administration (TNTA)

claimed that the appraisal of goodwill was not reasonable and that there were no unrecognized losses on

the sale of nonperforming loans in the Bank’s records on the date of the merger with the Farmers Bank

of China (FBC). Thus, TNTA denied the expenses for the goodwill amortization of $3,170,005

thousand and the deferred loss amortization of $3,105,522 thousand on the sale of nonperforming loans.

The Bankdisagreed with the TNTA’s decision and initiated administrative litigations. On December

30, 2014, TNTA allowed the partial amortization of goodwill expenses and of the losses the on sales of

nonperforming loans in the tax returns of 2006 to 2011 after the negotiation with the Bank. The Bank

recognized related income tax expenses of $228,990 thousand in 2014. On August 5, 2016, February

25, 2015 and April 9, 2015, respectively, TNTA had reexamined and corrected the Bank’s 2006 to 2011

ITRs based on the result of the negotiation with the Bank. The Bank had received $705,861 thousand

of the tax refund after TNTA’s reexamination and correction decision.

33. EARNINGS PER SHARE

The numerators and denominators used in calculating earnings per share were as follows:

Net Income

(Numerator)

Shares

(Denominator

in Thousands)

Earnings Per

Share

(NT$) For the year ended December 31, 2017

Basic earnings per share $ 12,899,194 8,699,342 $ 1.48


Basic earnings per share $ 12,523,601 8,469,743 $ 1.48

- 60 -

The number of shares outstanding was retrospectively adjusted to reflect the effects of the stock dividends

distributed in the year following earnings appropriation.

34. EQUITY

a. Capital stock

Common stocks

December 31

2017 2016

Number of shares authorized (in thousands) 10,000,000 10,000,000

Authorized capital $ 100,000,000 $ 100,000,000

Number of shares issued and fully paid (in thousands) 8,808,130 8,586,300

Common stocks issued $ 88,081,300 $ 85,863,000

Fully paid common stocks, which have a par value of $10, carry one vote per share and carry a right to

dividends.

On May 23, 2016, the Bank’s board of directors resolved to increase its capital by issuing 237,000

thousand shares of common stocks at NT$22.365 per share. TCFHC subscribed for all the new shares

and this capital increase transaction was approved by the Financial Supervisory Commission (FSC) and

the Ministry of Economic Affairs (MOEA).

On May 22, 2017, the Bank’s board of directors resolved to increase its capital by issuing 221,830

thousand shares of common stocks at NT$22.54 per share. TCFHC subscribed for all the new shares

and this capital increase transaction was approved by FSC and MOEA.

b. Capital surplus

Under related regulations, capital surplus may be used to offset a deficit. Capital surplus arising from

the issuance of shares in excess of par value (including additional paid-in capital from the issuance of

common shares and capital surplus from mergers and treasury stock transactions) and donations may be

distributed as cash dividends or transferred to common stock on the basis of the percentage of shares

held by the stockholders. Any capital surplus transferred to common stock should be within a certain

percentage prescribed by law.

Under related regulations, the capital surplus from equity investments under the equity method cannot

be distributed for any purpose.

c. Special reserve

Under FSC guidelines, the Bank reclassified to special reserve $165,255 thousand, the sum of trading

loss reserve and reserve for loss on branch of purchase commitments, which were in place until

December 31, 2010. The reclassified special reserve is unavailable to be used unless: (1) offset a

deficit or (2) when the special reserve reaches 50% of the Bank’s paid-in capital, 50% of the excess

may be used to issue new capital or (3) the FSC has approved that excess may be reversed to

unappropriated earnings when special reserve has exceeded the Bank’s paid-in capital.

As of December 31, 2017, the special reserve from equity investments under the equity method was

$14,944 thousand.

- 61 -

For the first-time adoption of IFRSs, the Bank should appropriate to a special reserve of an amount that

was the same as these of unrealized revaluation increment and cumulative translation differences

(gains) transferred to retained earnings as a result of the Bank’s use of exemptions under IFRS 1.

However, at the date of transitions to IFRSs, if the increase in retained earnings that resulted from all

IFRSs adjustments is not enough for this appropriation, only the increase in retained earnings that

resulted from all IFRSs adjustments will be appropriated to special reserve. The special reserve

appropriated as above may be reversed in proportion to the usage, disposal or reclassification of the

related assets and thereafter distributed. The special reserve appropriated on the first-time adoption of

IFRSs may be used to offset deficits in subsequent years. No appropriation of earnings shall be made

until any shortage of the aforementioned special reserve is appropriated in subsequent years if the Bank

has earnings and the original need to appropriate a special reserve is not eliminated.

The increase in retained earnings that resulted from all IFRSs adjustments was not enough for this

appropriation; therefore, the Bank appropriated to the special reserve an amount of $1,132,019 thousand

on January 1, 2013, the increase in retained earnings that resulted from all IFRSs adjustments on

transitions to IFRSs.

Information regarding the above special reserve appropriated or reversed on elimination of the original

need to appropriate a special reserve was as follows:


2017 2016

Balance on January 1 $ 1,037,384 $ 1,037,384

Reversed on elimination of the original need to appropriate a

special reserve:

Disposal of properties and equipment - -

Balance on December 31 $ 1,037,384 $ 1,037,384

Under Order No. 10510001510 issued by FSC, the appropriation of special reserve should be 0.5% to

1% of net income (net of income tax) when the Bank appropriates the earnings of 2016 to 2018. Since

2017, the Bank is allowed to make special reserve at the amount of the cost of employee transfer and

arrangement in connection with the development of financial technology. As of December 31, 2017,

the special reserve appropriated under the stipulation amounted to $62,618 thousand.

d. Appropriation of earnings

From the annual net income less any deficit, an amount equal to 30% thereof should be appropriated as

legal reserve and a certain amount, depending on regulations and operating needs, as special reserve.

The remaining net income and unappropriated earnings of prior years may be distributed as dividends to

shareholders or retained according to the distribution plan to be proposed by the board of directors and

submitted to the shareholders’ meeting for approval. Unless otherwise restricted by related

regulations, the cash dividends must be 10% or above of the total dividends and bonus distributed. If

the cash dividend per share is less than NT$0.1, the cash dividend will not be distributed unless the

distribution is resolved in the stockholders’ meetings.

If the legal reserve reaches the amount of paid-in capital or the Bank is sound in both its finance and

business operations and have set aside a legal reserve in compliance with the Company Law, the legal

reserve is not subject to the limitation of 30% set under the Banking Law and related regulations.

In accordance with the amendments to the Company Act in May 2015, the recipients of dividends and

bonuses are limited to stockholders and do not include employees. The Bank will make consequential

amendments to the Bank’s Articles of Incorporation. For information about the appropriation policy,

accrual basis and actual appropriations for the employees’ compensation, please refer to Note 31.

- 62 -

Under related regulations, a special reserve is appropriated from the balance of the retained earnings at

an amount from the net income and unappropriated earnings that is equal to the debit balance of

accounts in the stockholders’ equity section (such as exchange differences in translation of financial

statements of foreign operations and unrealized gains or losses on available-for-sale financial assets).

The special reserve should be appropriated from the prior years’ unappropriated earnings to the extent

of the debit balance accumulated from prior years and such special reserve should not be appropriated.

The balance of the special reserve is adjusted to reflect any changes in the debit balance of the related

accounts. If there is difference between appropriation of special reserve and net amount of deduction

in other stockholder’s equity, the Bank should appropriate on additional amount of special reserve in

the first-time adoption of IFRSs. Afterwards, if there is any reversal in of the deduction in other

stockholder’s equity, the Bank is allowed to appropriating retained earnings from the reversal amount.

Under the Company Law, legal reserve should be appropriated until the reserve equals the Bank’s

paid-in capital. This reserve should only be used to offset a deficit. When the reserve exceeds 25%

of the Bank’s paid-in capital, the excess may be used to issue new shares or distribute cash dividends.

Under the Income Tax Law, except for non-ROC resident stockholders, all stockholders receiving the

dividends are allowed a tax credit equal to their proportionate share of the income tax paid by the Bank.

The appropriations from the earnings of 2016 and 2015 were approved in the stockholders’ meetings on

May 22, 2017 and May 23, 2016, respectively. The appropriations and dividends per share were as

follows:

Appropriation of Earnings

Dividends Per Share

(NT$)

2016 2015 2016 2015

Legal reserve $ 3,757,080 $ 3,638,845

Special reserve 62,618 -

Cash dividends 8,703,900 8,490,630 $ 1.013696 $ 1.016927

Information on the appropriation of earnings or deficit offsetting can be accessed through the website of

the Taiwan Stock Exchange (http://emops.tse.com.tw).

35. RELATED-PARTY TRANSACTIONS

Taiwan Cooperative Financial Holding Co., Ltd. is the ultimate parent of the Bank, and the Ministry of

Finance is the major government stockholder. Based on IAS 24 “Related Party Disclosures” the

Company’s transactions with government-related parties are exempt from disclosure requirements. In

addition to those mentioned in other notes, the related-party transactions are summarized as follows:

a. Related parties

Related Party Relationship with the Bank

Taiwan Cooperative Financial Holding Company, Ltd.

(TCFHC)

Parent company

United Taiwan Bank S.A Subsidiary

Co-operative Assets Management Co., Ltd. Sister company

Taiwan Cooperative Bills Finance Co., Ltd. Sister company

Taiwan Cooperative Securities Co., Ltd. Sister company

BNP Paribas Cardif TCB Life Insurance Co., Ltd.

(BPCTLI)

Sister company

(Continued)

- 63 -

Related Party Relationship with the Bank

Taiwan Cooperative Securities Investment Trust Co., Ltd Sister company

Taiwan Cooperative Venture Capital Co., Ltd. (TCVC) Sister company

United Real Estate Management Co., Ltd. Associated enterprise

TCB Global High Yield Bond Fund Fund managed by Taiwan Cooperative

Securities Investment Trust Co., Ltd.

TCB Global Emerging Markets Equity Fund

Fund managed by Taiwan Cooperative

Securities Investment Trust Co., Ltd.

Tamshui First Credit Bank The director of Tamshui First Credit Bank

is also the Company’s director.

Giga Solution Tech. Co., Ltd. Giga’s independent director is also the

parent company’s independent director

(before October 15, 2016).

Others Main management of the parent company

and other related parties

(Concluded)

b. Significant transactions between the Bank and related parties:

1) Due from banks (part of cash and cash equivalents)

December 31

2017 2016

Subsidiary $ 573,480 $ 560,413

2) Call loans to banks

Highest Balance Ending Balance

Interest

Revenue

Interest Rate

(%)

For the year ended

December 31, 2017

Subsidiary $ 10,937,782 $ 6,645,722 $ 37,631 0.001-2.700

Sister companies 3,500,000 2,100,000 3,223 0.330-0.560

Others 7,500,000 3,454,900 16,373 0.270-4.150

$ 21,937,782 $ 12,200,622 $ 57,227

For the year ended

December 31, 2016

Subsidiary $ 8,319,902 $ 7,194,172 $ 22,689 0.001-2.800

Sister companies 4,900,000 3,500,000 12,831 0.280-0.560

Others 3,500,000 3,500,000 9,436 0.280-0.560

$ 16,719,902 $ 14,194,172 $ 44,956

- 64 -

3) Call loans to securities firms (part of other financial assets, net)

Highest Balance Ending Balance

Interest

Revenue

Interest Rate

(%)

For the year ended

December 31, 2017

Sister company

TCS $ 300,000 $ 296,800 $ 3,533 1.100-2.300

4) Due to banks


2017 2016

Ending Interest Ending Interest

Balance Expense Balance Expense

Subsidiary $ 3,618 $ - $ 2,552 $ -

Main management 240,738 1,237 212,703 1,242

Others

Tamshui First

Credit Bank 25,245,826 251,236 24,909,609 262,353

Others 5,417 - - 106

$ 25,495,599 $ 252,473 $ 25,124,864 $ 263,701

5) Call loans from banks

Highest Ending Interest Interest Rate

Balance Balance Expense (%)

For the year ended

December 31, 2017

Others $ 4,484,000 $ - $ 864 0.170-1.240

6) Loans


Balance Balance Revenue (%)

For the year ended

December 31, 2017

Sister company $ 280,333 $ - $ 43 2.265

Main management 170,998 125,007 1,469 1.245-2.428

Others 81,033 55,375 836 1.137-2.465

$ 532,364 $ 180,382 $ 2,348

- 65 -


Balance Balance Revenue (%)

For the year ended

December 31, 2016

Sister companies $ 84,120 $ - $ 24 2.265-2.405

Main management 155,972 132,988 1,975 1.260-2.428

Others 118,063 66,814 985 1.260-2.360

$ 358,155 $ 199,802 $ 2,984

Under the Banking Law, except for customer loans and government loans, credits extended by the

Bank to any related party should be 100% secured, and the terms of credits extended to related

parties should be similar to those for third parties.

7) Securities purchased under resell agreements

Ending Interest Interest

Balance Revenue Rate (%)


Sister companies

TCBF $ 199,521 $ 1,145 0.350-0.450

Others - 2 0-0.300

$ 199,521 $ 1,147


Sister company

TCBF $ - $ 6,139 0.300-0.460

8) Deposits

Ending Interest Interest Rate

Balance Expense (%)


Parent company $ 59,315 $ 95 0-0.080

Sister companies 1,533,971 7,564 0-2.900

Associates 232,996 452 0-0.775

Main management 525,325 9,900 0-13.000

Others 9,508,635 25,482 0-13.000

$ 11,860,242 $ 43,493

- 66 -

Ending Interest Interest Rate

Balance Expense (%)


Parent company $ 33,612 $ 97 0-0.110

Sister companies 2,328,509 21,631 0-1.360

Associates 173,263 519 0-1.130

Main management 438,049 9,877 0-13.000

Others 10,868,943 50,662 0-13.000

$ 13,842,376 $ 82,786

December 31

2017 2016

9) Accrued income (part of receivables)

Sister companies $ 48,405 $ 62,675

10) Accrued interest (part of receivables)

Subsidiary $ 1,965 $ 1,760

Sister companies 378 415

Others 7,154 549

$ 9,497 $ 2,724

11) Receivable on securities (part of receivables)

Sister company

TCS $ 153,075 $ 93,507

12) Tax receivable - consolidated tax return (part of current tax

assets)

Parent company $ 1,071,039 $ 951,196

13) Accrued interest (part of payables)

Sister companies $ 9 $ 20

14) Accrued expense (part of payables)


15) Payable on securities (part of payables)

Sister company

TCS $ 90,526 $ 12,040

- 67 -

December 31

2017 2016

16) Tax payable - consolidated tax return (part of current tax

liabilities)

Parent company $ 560,958 $ 129,356

17) Guarantee deposits received (part of other financial

liabilities)

Parent company $ 6,012 $ 1,773

Sister companies 15,425 15,386

$ 21,437 $ 17,159


2017 2016

18) Service fee income (part of service fee income, net)

Sister companies

BPCTLI $ 751,688 $ 906,735

Others 23,680 27,177

Associates 55 45

Main management 223 173

Others 1,242 340

$ 776,888 $ 934,470

19) Service charge (part of service fee income, net)


Main management 34 26

Others 4 7,893

$ 5,139 $ 16,991

20) Rental income (part of other noninterest gain, net)


Sister companies

TCS 27,791 26,763

Others 33,736 32,212

Others - 12,228

$ 75,932 $ 77,874

21) Information service fee (part of general and administration)


- 68 -


2017 2016

22) Investigation fee (part of general and administration)

Sister companies $ 172 $ 230

23) Other income (part of other noninterest gain, net)


Others 3,482 4,855

$ 5,001 $ 6,374

24) Donation (part of other noninterest gain, net)

Main management $ 3,700 $ 2,900

Terms of other transactions with related parties were similar to those for third parties, except for the

more favorable interest rate for managers’ savings within a prescribed limit. The Bank has

operating lease contracts with related parties, which cover certain office spaces within the Bank’s

building. The monthly rentals were based on rentals for buildings near the Bank.

25) Purchases and sales of securities


Related Party Purchases Sales

Sales Under

Repurchase

Agreements

Purchases

Under Resell

Agreements

Sister companies $ 49,755 $ 249,968 $ - $ 3,997,582


Related Party Purchases Sales

Sales Under

Repurchase

Agreements

Purchases

Under Resell

Agreements

Sister companies $ 1,498,666 $ - $ - $ 34,070,318

26) Derivatives


Type of Contract Nominal Valuation Amounts on the Balance Sheet

Related Party Derivatives Period Amounts Gain (Loss) Account Amounts

Sister company -

BPCTLI

Currency swap 2017.12.22-

2018.01.22

US$ 4,935 $ (1,559 ) Financial liabilities at

fair value through

profit or loss

$ (1,559 )


2018.01.22

US$ 10,033 (3,169 ) Financial liabilities at

fair value through

profit or loss

(3,169 )


2018.01.22


fair value through

profit or loss

(4,107 )

(Continued)

- 69 -





2018.01.08


fair value through

profit or loss

$ (1,030 )


2018.03.19

US$ 1,699 (559 ) Financial liabilities at

fair value through

profit or loss

(559 )


2018.03.19


fair value through profit or loss

(1,029 )


2018.03.19



(1,029 )


2018.03.19



(1,595 )


2018.03.19



(3,450 )


2018.01.16



(2,230 )


2018.01.16



(2,218 )


2018.01.16



(4,439 )


2018.01.16


fair value through

profit or loss

(4,429 )


2018.01.16



(2,220 )


2018.01.16



(4,648 )


2018.01.16



(851 )


2018.01.16



(1,582 )


2018.01.08



(647 )


2018.01.08



(3,224 )


2018.03.19



(1,699 )


2018.03.19



(1,584 )

Other - TCB Global

Emerging Markets Equity Fund


2018.03.13



(2,116 )


2018.03.13



(302 )

Other - TCB Global High Yield Bond

Fund

Currency swap 2017.12.13- 2018.03.13

US$ 4,000 (1,209 ) Financial liabilities at fair value through

profit or loss

(1,209 )

Currency swap 2017.12.13- 2018.03.13

US$ 3,000 (907 ) Financial liabilities at fair value through

profit or loss

(907 )

(Concluded)

- 70 -





2018.03.13


fair value through

profit or loss

$ (2,871 )


2018.01.10


fair value through

profit or loss

(1,587 )


2018.03.06



(5,011 )


2018.01.08



(833 )


2018.01.08



(1,332 )


2018.03.19



(1,197 )

Sister company -

BPCTLI


2017.02.22

US$ 4,936 1,317 Financial assets at fair

value through profit or loss

1,317


2017.02.22



2,677


2017.02.22



3,469


2017.01.06

US$ 3,187 242 Financial assets at fair

value through profit

or loss

242


2017.01.17



5,077


2017.04.11



(360 )


2017.01.17



1,236


2017.01.17



336


2017.01.17



521


2017.01.17



336


2017.03.15



(5,367 )


2017.03.14



1,597


2017.03.14



1,588


2017.03.14



3,179

Currency swap 2016.12.14- 2017.03.14

US$ 9,989 3,172 Financial assets at fair value through profit

or loss

3,172

Currency swap 2016.12.14- 2017.03.14

US$ 5,006 1,590 Financial assets at fair value through profit

or loss

1,590

(Continued)

- 71 -





2017.03.14

US$ 10,483 $ 3,329 Financial assets at fair


or loss

$ 3,329


2017.03.14



or loss

610

Other - TCB Global

High Yield Bond Fund


2017.02.10



790


2017.01.19



520


2017.02.10



113


2017.02.10



(161 )

(Concluded)

The realized profit on the currency swaps transactions with related parties were as follows:


2017 2016

Financial assets and liabilities at fair value through profit or

loss

Sister company

BPCTLI $ (200,452) $ 60,439

Others (30,115) (3,127)

$ (230,567) $ 57,312

27) Loans

December 31, 2017

Highest

Balance in the

Year Ended Loan Classification

Differences in

Terms of

Transaction

Compared with

Type

Account Volume or

Name

December 31,

2017 (Note)

Ending

Balance Normal Loans

Nonperforming

Loans Collaterals

Those for

Unrelated Parties

Consumer loans 44 $ 70,662 $ 49,598 $ 49,598 $ - Land and buildings None

Self-used housing

mortgage loans

40 181,369 130,784 130,784 - Land and buildings None

Other Taiwan Cooperative

Securities Co., Ltd.

280,333 - - - Bonds None

December 31, 2016

Highest

Balance in the

Year Ended Loan Classification

Differences in

Terms of

Transaction

Compared with

Type

Account Volume or

Name

December 31,

2016 (Note)

Ending

Balance Normal Loans

Nonperforming

Loans Collaterals

Those for

Unrelated Parties

Consumer loans 44 $ 108,562 $ 66,599 $ 66,599 $ - Land and buildings None

Self-used housing

mortgage loans

34 165,474 133,203 133,203 - Land and buildings None

Other Taiwan Cooperative

Securities Co., Ltd.

84,120 - - - Bonds None

Note: The highest balance is the largest sum in the year of all daily accounts for each type.

- 72 -

28) The Bank sold machinery and equipment to TCS in 2017; the selling price and carrying amounts

were both $60 thousand.

c. Salaries, bonuses and remunerations to main management


2017 2016

Salaries and other short-term employment benefits $ 129,266 $ 126,415

Post-employment benefits 12,922 12,918

Interest arising from the employees’ preferential rate in excess of

normal rates 3,885 4,370

$ 146,073 $ 143,703

36. PLEDGED ASSETS

a. In addition to those mentioned in other notes, the face values of the pledged bonds and certificates of

deposit are summarized as follows:

December 31

2017 2016

Collaterals for call loans of foreign currency $ 40,000,000 $ 40,000,000

Collaterals for day-term overdraft 30,000,000 30,000,000

Collaterals for overdraft of domestic U.S. dollar settlement 11,000,000 11,000,000

Collaterals for overdraft of domestic RMB settlement 1,455,680 2,312,000

Guarantee deposits for provisional collateral seizure for loan

defaults and others 1,385,300 1,125,300

Collaterals for overdraft of domestic JPY settlement 500,000 500,000

Overseas branches’ capital adequate reserve 362,859 360,864

Guarantee deposits for the trust business compensation reserve 220,000 200,000

Guarantee deposits for bills finance business 50,000 50,000

Guarantee deposits for securities operation 50,000 50,000

Collaterals for overseas branch U.S. dollar settlement 31,786 43,497

Overseas branches’ guarantee deposits for operation 5,936 6,444

Others 200 1,400

$ 85,061,761 $ 85,649,505

To comply with the Central Bank of the Republic of China’s (CBC) Interbank Funds Transfer and

Settlement System for real-time gross settlement (RTGS), the Bank provided certificates of deposit as

collateral for day-term overdraft (part of due from the Central Bank and call loans to other banks).

The pledged amount may be adjusted anytime, and the unused overdraft amount at the end of a day can

also be treated as the Bank’s liquidity reserve.

- 73 -

b. To expand their capital sourcing and enhance their liquidity position, the Bank’s Seattle Branch, Los

Angeles Branch, and New York Branch obtained access privileges at the Discount Window Account of

the Federal Reserve Bank. For this access, the three branches pledged the following assets:

(In Thousands of U.S. Dollars)

Outstanding Balance Collateral

Date Loan Bond Total Value

December 31, 2017 $ 308,429 $ - $ 308,429 $ 230,474

December 31, 2016 $ 304,786 $ 5,000 $ 309,786 $ 234,525

37. SIGNIFICANT CONTINGENT LIABILITIES AND UNRECOGNIZED COMMITMENTS

In addition to those mentioned in other notes, the significant contingencies and commitments were as

follows:

a. Lease agreements on premises occupied by the Bank’s branches are operating lease. Rentals are

calculated on the basis of the leased areas and are payable monthly, quarterly or semiannually. As of

December 31, 2017, refundable deposits on these leases totaled $126,451 thousand (part of refundable

deposits). Minimum future annual rentals are as follows:

December 31

2017 2016

Within one year $ 588,831 $ 631,700

One to five years 1,192,276 1,312,200

Over five years 127,766 112,219

$ 1,908,873 $ 2,056,119

The lease payments recognized as expenses are as follows:


2017 2016

Minimum lease payments $ 658,626 $ 658,976

Contingent rentals 1,274 1,103

$ 659,900 $ 660,079

b. Lease agreements on investment properties owned by the Bank and rent to others are operating lease.

Rentals are calculated on the basis of the leased areas and are receivable monthly, quarterly or

semiannually. The lessees have no preemptive rights to buy properties at the end of the lease

agreements. As of December 31, 2017, guarantee deposits on these leases totaled $55,568 thousand

(part of guarantee deposits received). Minimum future annual rentals are as follows:

December 31

2017 2016

Within one year $ 264,670 $ 179,312

One to five years 656,465 252,438

Over five years 12,195 18,372

$ 933,330 $ 450,122

- 74 -

c. As of December 31, 2017, the Bank’s outstanding major construction and procurement contracts

amounted to $5,764,141 thousand, of which $667,121 thousand was still unpaid.

d. According to the joint venture contract signed with BNP Paribas Assurance (BNPPA), the Bank signed

the tri-party agreement with BNP Paribas Cardif TCB Life Insurance Co., Ltd. (BPCTLI) and

Cooperative Insurance Brokers Co., Ltd. (CIB) on April 13, 2010, which identified BPCTLI as the sole

supplier of life insurance products for the Bank and CIB, also applying the Bank’s marketing channels

to sell life insurance products exclusively. However, the rights and obligations were assumed by TCB

since merger on June 24, 2016.

38. FINANCIAL INSTRUMENTS

a. Fair values of financial instruments that are not measured at fair value

Except for the financial assets and liabilities shown in the following table, management considers that

either the carrying amounts of financial assets and financial liabilities recognized in the financial

statements approximate their fair values or the fair values of the financial instruments cannot be

reasonably measured.

December 31

2017 2016

Carrying

Amount

Estimated

Fair Value Carrying

Amount

Estimated

Fair Value

Financial assets

Held-to-maturity financial

assets $ 513,789,325 $ 515,472,990 $ 510,048,964 $ 509,455,600

Debt instruments with no

active market 82,438,716 84,237,164 78,619,317 79,825,032


Bank debentures 64,610,000 65,621,526 74,610,000 75,636,377

Fair value hierarchy as at December 31, 2017

Total Level 1 Level 2 Level 3

Financial assets


assets $ 515,472,990 $ 7,371,150 $ 508,101,840 $ -

Debt investments with no

active market 84,237,164 - 84,237,164 -


Bank debentures 65,621,526 - 65,621,526 -

- 75 -

Fair value hierarchy as at December 31, 2016

Total Level 1 Level 2 Level 3

Financial assets


assets $ 509,455,600 $ 6,173,804 $ 503,281,796 $ -

Debt investments with no

active market 79,825,032 - 79,825,032 -


Bank debentures 75,636,377 - 75,636,377 -

b. The valuation techniques and assumptions the Bank uses for determining fair values are as follows:

The fair values of financial instruments traded on active markets are based on quoted market prices.

However, in many instances where there are no quoted market prices for the Bank’s various financial

instruments, fair values are based on estimates using other financial data and appropriate valuation

methodologies. The financial data obtained by the Bank for making estimations and assumptions for

financial instrument valuation is consistent with those used by other market participants to price

financial instruments. Fair values of forward contracts, currency swap contracts, foreign-currency

margin contracts, cross-currency swap contracts and interest rate swap contracts are calculated using the

discounted cash flow method, unless the fair values are provided by counterparties. Fair values of

option contracts are based on estimates using the Black Scholes pricing model.

The Bank estimates the fair value of each forward contract on the basis of the swap points quoted by

Reuters on each settlement date. Fair values of interest rate swap contracts and cross-currency swap

contracts are calculated using the Bloomberg information system, unless the fair values are provided by

counterparties. The calculation of the fair value of each option contract is based on the mid-price (the

average of bid and ask prices) quoted by Reuters and applied consistently

For debt instruments with no active market, if there are theoretical prices from GreTai Securities

Market (GTSM, an over-the-counter securities exchange) on the balance sheet date, they are used as the

basis for evaluating the fair value of debt instruments with no active market. Otherwise, the latest

trade prices and quoted prices by major markets are used. The fair values of bank debentures are

recorded as follows: (a) debentures with no maturity dates - at book values; (b) debentures with

floating interest rates - at theoretical prices quoted by the GTSM; and (c) debentures with fixed interest

rates - at estimates reached using the discounted cash flow method. The discount rates used were

between 0.7211% and 1.1545%, between 0.7325% and 1.3754% as of December 31, 2017 and 2016,

respectively, and were comparable with interest rates for loans with similar terms and characteristics.

- 76 -

c. The hierarchies of the financial instruments measured at fair value on a recurring basis as of December

31, 2017 and 2016 were as follows:

Financial Instrument December 31, 2017

Measured at Fair Value Total Level 1 Level 2 Level 3

Non-derivative financial

instruments

Assets

Financial assets at FVTPL

Held-for-trading

financial assets

Stocks $ 1,078,689 $ 1,078,689 $ - $ -

Debt instruments 892,154 136,488 755,666 -

Others 8,348,633 - 8,348,633 -

Available-for-sale

financial assets

Stocks 4,316,380 4,316,380 - -

Debt instruments 149,993,993 4,978,739 145,015,254 -

Others 131,123 131,123 - -

Liabilities

Financial liabilities at

FVTPL (11,688,291) - (11,688,291) -

Derivative financial

instruments

Assets

Financial assets at FVTPL 2,543,367 26,197 2,517,170 -

Liabilities


FVTPL (2,762,560) - (2,762,560) -



Non-derivative financial

instruments

Assets

Financial assets at FVTPL

Held-for-trading

financial assets

Stocks $ 902,142 $ 902,142 $ - $ -


Others 18,918,778 - 18,918,778 -

(Continued)

- 77 -



Available-for-sale

financial assets

Stocks $ 4,230,764 $ 4,230,764 $ - $ -


Others 282,576 282,576 - -

Liabilities


FVTPL (12,336,035) - (12,336,035) -


instruments

Assets

Financial assets at FVTPL 3,550,158 3,736 3,546,422 -

Liabilities


FVTPL (2,294,976) - (2,294,976) -

(Concluded)

d. Information on financial liabilities designated as at fair value through profit or loss is as follows:

December 31

2017 2016

Difference between carrying amount and contractual amount at

maturity:

Fair value $ 11,688,291 $ 12,336,035

Amount payable at maturity 11,872,000 12,888,000

$ (183,709) $ (551,965)

Change in Fair

Values

Resulting from

Credit Risk

Variations

Change in amount in the year

2017 $ (32,084)

2016 $ 32,330

Accumulated amount of change

As of December 31, 2017 $ 2,414

As of December 31, 2016 $ 34,498

- 78 -

The change in fair value attributable to change in credit risk was calculated as the difference between

total change in fair value of bank debentures and the change in fair value due to change in market risk

factors alone. The change in fair value due to market risk factors was calculated using benchmark

interest yield curves as at the end of the reporting period holding. The fair value of bank debentures

was estimated by discounting future cash flows using quoted benchmark interest yield curves as at the

end of the reporting period and by obtaining lender quotes for borrowing of similar maturity to estimate

credit risk margin.

f. Information on financial risk management

1) Risk management

The objective of risk management is to develop a sound risk management mechanism, and on the

basis of the risk tolerance level and the expected return level, pursue the maximum value of

stockholders’ investments. The main risks faced by the Bank include the business credit risk in-

and off- balance-sheet, market risks (including interest, exchange, equity security, and commodity

risks) and liquidity risk.

The Bank has risk management policies and risk monitoring procedures, which have been reviewed

and approved by the Board and are used to effectively identify, measure, monitor and control credit,

market, and operating and liquidity risks.

The Board, the highest decision-making unit for the risk management, takes charge of approving the

risk management policy and system and building the risk management culture. It also takes

ultimate responsibility for overall risk management.

Under the risk management decision approved by the Board, the risk management committee takes

charge of and reviews all the Bank’s risk management implementation, capital adequacy

assessment, and risk exposure management. It also communicates and the inter-departmental risk

management issues and coordinates issue handling and continually monitor the execution of risk

management procedures. The risk management department is responsible for planning and

designing the risk management system, deliberating capital allocation, setting up the instruments for

risk measurement and capital provision, and monitoring risk control. This department also

regularly prepares reports for submission to senior management, the risk management committee

and the Board.

Under the business management regulation and risk policy, the business supervising unit manages

and oversees each business unit toward proper risk management and carries out risk review and

control. In addition, the Audit Department independently audits at least once a year all risk-related

businesses and timely provides suggestions for improvement.

2) Credit risk

Credit risk refers to a borrower, a financial instrument issuer or a transaction counterparty

undergoing financial difficulty or other adverse situations (such as a dispute between the borrower

and its business partner), which could result in loss due to breach of contract. Credit risk can come

from on- and off-balance-sheet items. On-balance sheet items are mainly lending, due from bank

and call loans to other banks, security investment and derivatives. Off-balance sheet items are

mainly guarantees, acceptance, letters of credit and loan commitments.

- 79 -

The risk management policy, which is founded on the basic principles of safety, liquidity,

profitability, welfare and growth, is implemented by the credit risk management division toward the

cultivation of a risk management culture. All on- and off- balance sheet transactions are should be

detailed analyzed in detail to identify existing and potential credit risk. Based on the Bank’s

business characteristics and the principle of risk diversification, risk status is analyzed and

evaluated, centralized limits are set, and a risk monitoring and alert mechanism has been developed

and operated. For a more effective credit risk evaluation, an internal rating system has been

created to enhance the ability to quantify risk.

The Bank’s main business items that are measured and managed for credit risks are as follows:

a) Loans business (including loan commitment and guarantees):

Credit assets are classified into five categories. In addition to normal credit assets that are

classified as sound assets, the unsound assets are classified, on the basis of the valuation of

collaterals and the length of time the payments become overdue, as special mention,

substandard, with collectability high doubtful and uncollectable. The Bank also sets up

policies for the management of doubtful credits and the collection of overdue debts to deal with

collection problems.

The Bank applies to its credit business the so-called “5Ps of credit analysis” as the basis for

lending approval and evaluation of its counterparties. These 5Ps are: People (know

customers’ background and their credit status well); purpose (what will the fund be used for);

payment (the borrower’s ability to repay an obligation when it falls due); protection (the Bank’

recourse on repayment defaults); and perspective (how the credit is seen in light of rewards and

risks). After a loan is granted, the transaction is reviewed and monitored to ensure creditor’s

rights of the Bank.

To quantify credit risk, the Bank applies statistical methods using with customers’ qualitative

data and lending history to develop a rating module for corporate finance and consumer finance.

This module is used to create an internal credit rating system for risk evaluation, in which 9 is

the base grade of the credit quality of corporate customers, and 9 or 10 on the business segment

consumer customers.

The 5P credit analysis and the module rating specifically apply to corporate customers. Micro

credits and residential mortgages are assessed by using the credit rating model, and consumer

loans are assessed individually for default risks.

b) Due from and call loans to other banks

The Bank evaluates the credit status of counterparties before closing deals. The Bank grants

different limits to the counterparties on the basis of their respective credit ratings as suggested

by domestic and foreign credit rating agencies.

c) Investments in debt instruments and derivatives

The Bank identifies and manages credit risks from debt instruments through the use of external

credit ratings of the debt instruments along with the evaluation of credit qualities of bonds,

regional conditions and counterparty risks.

The Bank conducts derivative transactions with other banks and sets the credit limits (including

lending limits) at their credit rating and the ranking given by the Banker magazine. The credits

extended to general customers are monitored in accordance with the related contract terms and

conditions and the credit limits for derivatives established through normal credit granting

processes.

- 80 -

The Bank has a series of measures for credit granting to reduce credit risks. One of the procedures

is asking for collaterals from the borrowers. To secure a debt, the Bank manages and assesses the

collaterals following the procedures that determine the scope of collateralization and valuation of

collaterals and the process of disposition. In credit contracts, the Bank stipulates the security

mechanism for debts; the conditions and terms for collaterals; and the terms and conditions of

offsetting to state clearly that the Bank reserves the right to reduce the granted quota, to reduce the

repayment period, to demand immediate settlement or to offset the debts of the borrowers by their

deposits in the Bank in order to reduce the credit risks.

To avoid the concentration of credit risks, the Bank sets up centralized credit limits for business

segments, countries, collaterals, groups, and construction financing. Monthly, or more frequently,

as needed, the Bank reviews credit limits, monitors the actual risk-exposure condition and whether

the usage rate of limits meets relevant regulations and reports the review results to superior

management, risk management committee and the Board periodically. If there is a possibility of

breach of the credit limits, the related department or division will apply appropriate procedures to

ensure that the credit limits are followed.

The Bank settles most of its transactions at gross amounts. For further reduction of credit risks,

settlement netting is used for some counterparties or in some circumstances where the transactions

are terminated because of counterparty’s default.

The maximum exposures to credit risks of assets on the balance sheets without consideration of

guarantees or other credit enforcement instruments approximate the assets’ carrying amounts. The

maximum exposures of off-balance sheet items to credit risks without consideration of guarantees

or other credit enforcement instruments are as follows:

December 31

2017 2016

Irrevocable loan commitments issued $ 93,831,572 $ 100,916,991

Irrevocable credit card commitments 45,082,276 41,895,556

Letters of credit issued yet unused 18,727,577 21,152,739

Other guarantees 79,802,266 78,348,294

The Bank’ management believes its ability to minimize credit risk exposures on off-balance sheet

items is mainly due to its rigorous evaluation of credit extended and the periodic reviews of these

credits.

Concentration of credit risk exists when counterparties to financial transactions are individuals or

groups engaged in similar activities or activities in the same region, which would cause their ability

to meet contractual obligations to be similarly affected by changes in economic or other conditions.

The profile by group or industry, regions and collaterals of obligations that were 10% or more of

total outstanding loans is as follows:

December 31

Credit Risk Profile by 2017 2016

Group or Industry Amount % Amount %

Natural person $ 819,375,254 41 $ 809,134,142 39

Manufacturing 383,995,457 19 327,044,724 16

Some financial assets held by the Bank, such as cash and cash equivalents, due from the Central

Bank and call loans to other banks, financial assets at fair value through profit or loss, securities

purchased under resell agreements, call loans to securities firms and refundable deposits, are

exposed to low credit risks because the counterparties have high credit ratings.

- 81 -

In addition to the above assets, credit quality analysis of other financial assets are as follows:

a) Credit quality analysis of discounts, loans and receivables

December 31, 2017 Neither Past Due

Nor Impaired (A)

Past Due But Not

Impaired (B) Impaired (C)

Total

(A)+(B)+(C)

Provision for Impairment Losses (D) Net

(A)+(B)+

(C)-(D)

With Objective

Evidence of

Impairment

With No Objective

Evidence of

Impairment

Receivables

Credit cards $ 3,114,017 $ 43,409 $ 56,635 $ 3,214,061 $ 19,868 $ 17,208 $ 3,176,985

Others 15,161,836 34,901 914,027 16,110,764 607,932 86,235 15,416,597

Discounts and loans 1,976,328,352 12,537,799 30,410,294 2,019,276,445 5,675,743 19,364,766 1,994,235,936

December 31, 2016 Neither Past Due

Nor Impaired (A)

Past Due But Not

Impaired (B) Impaired (C)

Total

(A)+(B)+(C)

Provision for Impairment Losses (D) Net

(A)+(B)+

(C)-(D)

With Objective

Evidence of

Impairment

With No Objective

Evidence of

Impairment

Receivables

Credit cards $ 2,832,619 $ 38,059 $ 61,942 $ 2,932,620 $ 25,376 $ 17,420 $ 2,889,824

Others 11,538,084 24,406 1.017,271 12,579,761 599,917 60,974 11,918,870

Discounts and loans 1,945,179,121 7,549,281 29,579,604 1,982,308,006 6,529,359 16,818,185 1,958,960,462

b) Credit quality analysis of discounts and loans not past due and not impaired

Items December 31,

2017

December 31,

2016

Loans

Secured $ 1,409,387,398 $ 1,407,436,657

Unsecured 566,940,954 537,742,464

Total $ 1,976,328,352 $ 1,945,179,121

c) Credit quality analysis of securities

December 31, 2017

Neither Past

Due Nor

Impaired (A)

Past Due But

Not Impaired

(B)

Impaired (C) Total

(A)+(B)+(C)

Provision for

Impairment

Losses (D)

Net

(A)+(B)+

(C)-(D)

Available-for-sale

financial assets Debt instruments $ 149,993,993 $ - $ - $ 149,993,993 $ - $ 149,993,993

Equities 4,316,380 - - 4,316,380 - 4,316,380

Others 131,123 - - 131,123 - 131,123 Held-to-maturity financial

assets

Debt instruments 110,841,605 - - 110,841,605 3,304 110,838,301 Others 402,951,024 - - 402,951,024 - 402,951,024

Other financial assets

Debt instruments 82,438,716 - - 82,438,716 - 82,438,716 Equities 4,092,383 - - 4,092,383 - 4,092,383

Others 20,145,645 - - 20,145,645 - 20,145,645

December 31, 2016

Neither Past

Due Nor

Impaired (A)

Past Due But

Not Impaired

(B)

Impaired (C) Total

(A)+(B)+(C)

Provision for

Impairment

Losses (D)

Net

(A)+(B)+

(C)-(D)

Available-for-sale

financial assets

Debt instruments $ 119,127,606 $ - $ - $ 119,127,606 $ - $ 119,127,606 Equities 4,230,764 - - 4,230,764 - 4,230,764

Others 282,576 - - 282,576 - 282,576

Held-to-maturity financial assets

Debt instruments 77,851,299 - - 77,851,299 10,859 77,840,440

Others 432,208,524 - - 432,208,524 - 432,208,524 Other financial assets

Debt instruments 78,619,317 - - 78,619,317 - 78,619,317

Equities 4,092,383 - - 4,092,383 - 4,092,383 Others 17,133,396 - - 17,133,396 - 17,133,396

The processing delays by the borrowers and other administrative reasons may cause financial

assets to become past due but not impaired. As defined in the internal rules governing the

Bank’s risk management, financial asset that are past due within 90 days are not deemed as

impaired, unless there are evidences that indicate impairment.

- 82 -

The vintage analysis of financial assets that are past due but not impaired is as follows:

Items

December 31, 2017

Past Due Up to

1 Month

Past Due by

Over 1 Month-

3 Months

Total

Receivables

Credit cards $ 34,314 $ 9,095 $ 43,409

Others 18,318 16,583 34,901

Loans

Secured 8,416,499 2,867,567 11,284,066

Unsecured 1,132,174 121,559 1,253,733

Available-for-sale financial assets

Debt instruments - - -

Others - - -



Others - - -



Others - - -

Items

December 31, 2016

Past Due Up to

1 Month

Past Due by

Over 1 Month-

3 Months

Total

Receivables

Credit cards $ 25,302 $ 12,757 $ 38,059

Others 13,000 11,406 24,406

Loans

Secured 4,878,706 1,446,303 6,325,009

Unsecured 975,989 248,283 1,224,272

Available-for-sale financial assets


Others - - -



Others - - -



Others - - -

3) Market risks

Market risk refers to the risk of losses in positions arising from adverse movements of market

prices. It refers to interest rates, exchange rates, equity security prices, commodity prices, etc.

The main market risks that the Bank faces are equity security, interest rate, and exchange rate risks.

The market risk position of equity security mainly includes domestic listed and OTC stocks,

domestic stock index options and stock market index futures; the position of interest rate mainly

includes short-term bills, bonds and interest rate derivative instruments; and the instruments

exposed to exchange rate risk mainly include spot contracts and forward contracts and derivatives

denominated in foreign currency.

- 83 -

Under the market risk management policies approved by the board of directors, the new Basel

Capital Accord and regulations implemented by relevant authorities and in consideration of the

Bank’s own market risk management system and its overall risk management goals and product

features, the Bank has set all types of investment authorization limits and stop-loss rules, regularly

reviews the customers’ credit status and compiles management information reports to control all

types of market risks effectively.

The Bank’s market risk management procedures include risk identification, measurement, and

assessment as well as risk monitoring and reporting. Every units’ risk management personnel

analyze data on market risk position and evaluate measurement methods, including the statistical

basic measurement method, sensitivity analysis, and situational analysis. Monitoring content

includes trading processes, collective and individual, of all transaction units and all financial

instruments, such as change of position, change of profit and loss, trading pattern, and if trading

objects are transacted within the authorized scope and limits.

The Bank’s business units and risk management unit have established market risk factors for

identifying risk exposure positions and use these factors to measure market risks. The market risk

factors refer to the components of financial instruments’ position, such as profit and loss and

sensitivity to risk, which might be affected by interest rates, exchange rates and equity security

market prices.

The Bank’s risk management unit reports to management periodically the execution status of

measures on market risk management, investment positions, and profit and loss control so that

management can fully understand the status of market risk management. The Bank also has

cleared reporting procedures and rules for all types of transaction limits and the stop-loss order. If

any transaction amount reaches the limit, the stop-loss order is executed immediately; if the

stop-loss order is not executed, the transaction unit is required to explain the reasons for

non-execution and prepare a response plan for management’s approval.

The Bank applies market risk sensitivity as a risk control instrument. Market risk sensitivity

position refers to the change in the value of a position due to a change in a certain market risk

factor. Market risk factors include interest rates, exchange rates, and equity security prices. The

Bank’s position sensitivity exposure trading book contains all types of positions exposed to market

risk and the range of change to which sensitivity analysis applied under various pressure scenarios

for all types of risk factors.

Assuming all other factors are held constant, the effects of risks within defined change scenarios are

shown below:

Main Risk Change Scenario December 31,

2017

December 31,

2016

Interest rate risk

Interest rate curve increased 100 basis

points $ (39,258) $ (338,493)

Interest rate curve fell 100 basis points 39,988 363,546

Exchange rate risk

USD/NT$, EUR/NT$ increased 3% (195,579) (132,789)

USD/NT$, EUR/NT$ fell 3% 195,579 132,789

Others (RMB, AUD etc.)/NT$ increased

5% (9,514) 220,149

Others (RMB, AUD etc.)/NT$ fell 5% 9,514 (220,149)

Equity security

price risk

Equity security price increased by 15% 165,096 120,054

Equity security price fell by 15% (162,501) (120,054)

- 84 -

Average amount and average interest rate of interest-earning assets and interest-bearing liabilities

are as follows:

Average balance is calculated by the daily average balances of interest-earning assets and

interest-bearing liabilities.


2017 2016

Average Average Average Average

Balance Rate (%) Balance Rate (%)

Interest-earning assets

Due from banks and other financial assets - due from

banks $ 30,526,712 2.23 $ 26,939,023 1.82

Due from the Central Bank 163,470,160 0.36 363,032,312 0.54

Call loans to banks and other financial assets - call

loans to securities firms 70,515,192 1.48 120,352,203 0.96

Held-for-trading financial assets 12,765,648 0.63 19,652,234 0.50

Securities purchased under resell agreements 610,384 0.32 1,945,294 0.34

Discounts and loans 1,970,325,763 2.01 1,964,562,393 2.01

Available-for-sale financial assets 136,654,032 1.92 101,153,901 2.07

Held-to-maturity financial assets 514,022,532 0.73 478,884,429 0.48

Debt instruments with no active market 81,465,943 2.31 81,841,417 2.07

Interest-bearing liabilities

Due to the Central Bank and other banks 224,358,551 0.73 212,433,189 0.55

Financial liabilities designated as at fair value

through profit or loss 12,120,592 4.50 12,887,847 4.33

Securities sold under repurchase agreements 10,337,481 0.23 12,526,955 0.27

Demand deposits 489,195,961 0.12 487,840,156 0.12

Savings - demand deposits 811,456,768 0.27 766,805,420 0.32

Time deposits 468,497,554 1.15 491,914,674 1.04

Time savings deposits 658,949,831 1.06 677,825,139 1.15

Treasury deposits 84,055,258 0.65 82,155,852 0.70

Negotiable certificates of deposits 5,392,127 0.35 4,834,141 0.31

Structured products 2,720,350 1.46 4,347,486 0.62

Bank debentures 70,144,247 1.34 70,935,137 1.36

The exchange rate risk is as follows:

December 31, 2017

(In Thousands)

Foreign

Currencies Exchange Rate

Carrying

Amount

Financial assets

USD $ 11,001,049 29.6800 $ 326,511,122

RMB 12,538,702 4.5490 57,038,555

AUD 945,865 23.1350 21,882,580

JPY 41,602,226 0.2633 10,953,866

EUR 305,602 35.4500 10,833,599

HKD 1,714,624 3.7960 6,508,711

ZAR 1,831,692 2.3900 4,377,743

GBP 59,936 39.9300 2,393,249

(Continued)

- 85 -

Foreign


Carrying

Amount

CAD $ 29,282 23.6300 $ 691,945

NZD 20,386 21.0700 429,537

CHF 11,219 30.3350 340,330

SGD 2,144 22.2000 47,601

THB 10,337 0.9129 9,437

SEK 2,327 3.6000 8,378

KHR 782,844 0.0073 5,715

PHP 3,855 0.5938 2,289

Investment accounted for using equity

method

EUR 54,992 35.4500 1,949,463


USD 11,796,573 29.6800 350,122,274

RMB 11,437,152 4.5490 52,027,606

AUD 775,205 23.1350 17,934,368

JPY 54,569,470 0.2633 14,368,141

ZAR 2,875,459 2.3900 6,872,348

EUR 171,238 35.4500 6,070,378

NZD 210,686 21.0700 4,439,155

HKD 1,006,936 3.7960 3,822,329

CAD 58,801 23.6300 1,389,460

GBP 31,502 39.9300 1,257,861

CHF 17,122 30.3350 519,385

SGD 9,853 22.2000 218,734

SEK 16,506 3.6000 59,423

THB 12,133 0.9129 11,076

PHP 1,999 0.5938 1,187

KHR 2,889 0.0073 21

MYR - 7.3020 2

(Concluded)

December 31, 2016

(In Thousands)

Foreign


Carrying

Amount

Financial assets

USD $ 10,121,373 32.2200 $ 326,110,627

RMB 11,012,099 4.6240 50,919,947

AUD 810,359 23.3450 18,917,825

EUR 351,827 33.9800 11,955,070

JPY 45,455,324 0.2771 12,595,670

HKD 1,363,517 4.1540 5,664,050

GBP 109,062 39.6100 4,319,963

ZAR 1,530,864 2.3700 3,628,149

(Continued)

- 86 -

Foreign


Carrying

Amount

CAD $ 127,698 23.9200 $ 3,054,547

NZD 29,023 22.4600 651,851

CHF 8,722 31.6050 275,669

SGD 5,439 22.3100 121,342

SEK 2,920 3.5500 10,368

THB 7,357 0.9042 6,652

KHR 736,959 0.0080 5,869

PHP 4,412 0.6510 2,872

Investment accounted for using equity

method

EUR 51,821 33.9800 1,760,886


USD 10,991,611 32.2200 354,149,711

RMB 10,097,452 4.6240 46,690,618

AUD 829,637 23.3450 19,367,867

JPY 38,008,073 0.2771 10,532,037

EUR 219,707 33.9800 7,465,648

ZAR 2,773,328 2.3700 6,572,788

HKD 833,999 4.1540 3,464,432

GBP 67,639 39.6100 2,679,161

NZD 88,911 22.4600 1,996,935

CAD 69,130 23.9200 1,653,596

SGD 16,146 22.3100 360,211

CHF 8,466 31.6050 267,562

SEK 18,496 3.5500 65,662

THB 14,106 0.9042 12,754

PHP 1,573 0.6510 1,024

KHR 2,888 0.0080 23

MYR - 7.1840 2

(Concluded)

4) Liquidity risk

Liquidity risk is inherent in all bank operations and might be affected by specific or general industry

and environmental events. These events include credit-related events, mergers or acquisitions,

systemic changes and natural disasters. The Bank defines liquidity risk as the inability to realize

assets or to obtain financing for meeting obligations when they fall due, resulting in loss.

The liquidity risk management strategy is based on the overall risk management objectives and

involves liquidity risk, identification, measurement, monitoring and control to maintain the Bank’s

appropriate liquidity and ensure adequate funding for meeting liability obligations or for capital

growth.

The liquidity risk management procedures involve identification, measurement, monitoring and

report of risk. Each business unit should identify the existing liquidity risk in business activities

and financial products.

- 87 -

For adequate liquidity for all types of deposits, the Bank follows the relevant regulations issued by

the Central Bank to estimate the liquidity reserves and calculates and controls daily liquidity reserve

ratios.

For the Bank’s operating liquidity, the fund disbursement unit performs daily cash flow

management and monitoring of the payments schedule on the basis of detailed reports by different

departments and relevant rules.

The risk management department regularly generates risk reports, which include the liquidity

reserve ratios and the maturity analysis of instruments and transactions denominated in major

foreign currencies, and submits them to the Asset and Liability Management Committee and the

Board as reference for decision making.

The Bank stipulates liquidity risk limits, which are regularly monitored and reviewed by the risk

management department. If a liquidity risk limit is exceeded or other exception situations occur,

the business supervising unit immediately develops appropriate contingency measures and submits

them to the Asset and Liability Management Committee for approval and implementation.

The Bank contingency measures for business emergency or sudden liquidity crisis are aimed at

quick crisis resolution and resumption of normal operations.

The Bank’s liquidity reserve ratios were 24.49% and 25.51% in December 2017 and 2016,

respectively.

The Bank disclosed the analysis of cash outflows on non-derivative financial liabilities by their

residual maturities as of the balance sheet dates. The amounts of cash outflows are based on

contractual cash flows, so some amounts may not correspond to those shown in the balance sheets.

December 31, 2017 0-30 Days 31-90 Days 91-180 Days 181 Days-1 Year Over 1 Year Total

Due to the Central Bank and

other banks $ 159,727,083 $ 43,182,766 $ 9,108,939 $ 281,277 $ - $ 212,300,065

Financial liabilities at fair

value through profit or loss - - - - 11,872,000 11,872,000

Securities sold under

repurchase agreements 5,864,963 2,724,763 1,787,416 - - 10,377,142

Payables 35,880,764 1,246,909 3,837,151 2,055,960 1,670,382 44,691,166

Deposits and remittances 269,307,534 372,239,027 358,146,507 617,273,614 1,007,631,653 2,624,598,335

Bank debentures - - 10,000,000 4,610,000 50,000,000 64,610,000

Other items of cash outflow

on maturity 3,682,515 28,407 1,367 2,736 34,520 3,749,545


Due to the Central Bank and

other banks $ 155,478,478 $ 58,665,170 $ 10,705,464 $ 819,799 $ - $ 225,668,911

Financial liabilities at fair

value through profit or loss - - - - 12,888,000 12,888,000

Securities sold under

repurchase agreements 7,099,872 2,993,323 1,765,115 142,521 - 12,000,831

Payables 35,193,871 1,438,491 3,875,492 1,793,774 1,361,129 43,662,757

Deposits and remittances 252,935,486 358,035,917 351,403,740 595,384,842 1,006,397,207 2,564,157,192

Bank debentures - - 8,000,000 4,000,000 62,610,000 74,610,000

Other items of cash outflow

on maturity 2,229,703 61,082 12,886 44,146 266,308 2,614,125

In the above table, the maturity analysis of deposits and remittances by residual-maturity period was

based on the Bank’s historical experience. Assuming that all demand deposits as of December 31,

2017 and 2016 must be repaid soon, the capital expenditure will be increased by $1,382,433,220

thousand and $1,332,990,997 thousand, respectively, within 30 days these balance sheet dates.

- 88 -

The Bank assesses the maturity dates of contracts to understand the basic elements of all derivative

financial instruments shown in the balance sheets. The amounts used in the maturity analyses of

derivative financial liabilities are based on contractual cash flows, so some of these amounts may

not correspond to the amounts shown in the balance sheets. The maturity analysis of derivative

financial liabilities is as follows:

a) Derivative financial liabilities to be settled at net amounts

December 31, 2017 0-30 Days 31-90 Days 91-180 Days 181 Days-

1 Year Over 1 Year Total

Derivative financial liabilities at fair value

through profit or loss

Currency $ 621 $ 483 $ 418 $ 138 $ - $ 1,660

Interest (3,677 ) (401 ) (2,430 ) (9,393 ) (1,657 ) (17,558 )




liabilities at fair value

through profit or loss Currency $ 12 $ 1,104 $ 512 $ 328 $ - $ 1,956

Interest (2,597 ) - (2,572 ) (4,433 ) (7,996 ) (17,598 )

b) Derivative financial liabilities to be settled at gross amounts


Derivative financial liabilities

at fair value through profit

or loss

Currency derivatives

Cash outflow $ 99,247,171 $ 65,867,834 $ 54,369,486 $ 36,184,259 $ - $ 255,668,750

Cash inflow 57,779,732 66,617,923 55,079,076 36,673,161 - 216,149,892

Interest derivatives

Cash outflow 586,432 302,851 5,283 183,819 598,882 1,677,267

Cash inflow 478,036 408,408 - 178,024 604,980 1,669,448

Total cash outflow 99,833,603 66,170,685 54,374,769 36,368,078 598,882 257,346,017

Total cash inflow 58,257,768 67,026,331 55,079,076 36,851,185 604,980 217,819,340

Net cash flow (41,575,835 ) 855,646 704,307 483,107 6,098 (39,526,677 )


Derivative financial liabilities

at fair value through profit

or loss

Currency derivatives

Cash outflow $ 100,614,110 $ 48,649,694 $ 10,212,981 $ 5,547,481 $ 6,320 $ 165,030,586

Cash inflow 101,570,350 49,045,790 10,199,070 5,596,383 6,347 166,417,940

Interest derivatives

Cash outflow - 75,283 483,522 113,737 21,502,697 22,175,239

Cash inflow - 594,624 419,155 - 30,163,544 31,177,323

Total cash outflow 100,614,110 48,724,977 10,696,503 5,661,218 21,509,017 187,205,825

Total cash inflow 101,570,350 49,640,414 10,618,225 5,596,383 30,169,891 197,595,263

Net cash flow 956,240 915,437 (78,278 ) (64,835 ) 8,660,874 10,389,438

The Bank conducted maturity analysis of off-balance sheet items based on the residual

maturities as of the balance sheet dates. For the financial guarantee contracts issued, the

maximum amounts of the guarantees are included in the earliest periods that the guarantee

obligation might have been required to be fulfilled. The amounts used in the maturity analysis

of off-balance sheet items are based on contractual cash flows, so some of these amounts may

not correspond to those shown in the balance sheets.



Irrevocable loan

commitments issued $ 794,925 $ 830,041 $ 11,337,789 $ 39,720,416 $ 41,148,401 $ 93,831,572 Irrevocable credit card

commitments 2,348,868 80,095 792,986 1,183,528 40,676,799 45,082,276

Letters of credit issued yet unused 4,460,709 9,501,553 1,866,932 732,598 2,165,785 18,727,577

Other guarantees 3,247,217 3,405,653 5,747,747 7,742,939 59,658,710 79,802,266

- 89 -



Irrevocable loan

commitments issued $ 2,456,708 $ 6,528,417 $ 7,806,476 $ 8,640,285 $ 75,485,105 $ 100,916,991 Irrevocable credit card

commitments 28,740 215,260 905,725 1,189,421 39,556,410 41,895,556

Letters of credit issued yet unused 4,003,758 11,034,135 2,257,950 887,836 2,969,060 21,152,739

Other guarantees 3,236,388 6,495,515 4,815,740 9,304,642 54,496,009 78,348,294

f. Transfers of financial assets

Under the Bank operations, most of derecognized financial assets are securities sold under repurchase

agreements, and the contractual cash flows have been transferred to others. The Bank has the

responsibility to repurchase transferred financial assets at fixed prices, and can not use, sell and pledge

transferred financial assets. However, the Bank is still in the risk exposure of interest rate and credit,

so the transferred financial assets can not be removed entirely. The information on derecognized

financial assets and liabilities is as follows:

December 31, 2017

Financial Assets

Carrying

Amount of

Transferred

Financial

Assets

Carrying

Amount of

Related

Financial

Liabilities

Fair Value of

Transferred

Financial

Assets

Fair Value of

Related

Financial

Liabilities

Net Position of

Fair Value

Financial assets at

FVTPL -

securities sold

under repurchase

agreements $ 3,050,092 $ 3,051,511 $ 3,050,092 $ 3,051,511 $ (1,419)

Available-for-sale

financial assets -

securities sold

under repurchase

agreements 6,867,946 7,325,631 6,867,946 7,325,631 (457,685)

December 31, 2016

Financial Assets

Carrying

Amount of

Transferred

Financial

Assets

Carrying

Amount of

Related

Financial

Liabilities

Fair Value of

Transferred

Financial

Assets

Fair Value of

Related

Financial

Liabilities

Net Position of

Fair Value

Financial assets at

FVTPL -

securities sold

under repurchase

agreements $ 4,500,805 $ 4,502,898 $ 4,500,805 $ 4,502,898 $ (2,093)

Available-for-sale

financial assets -

securities sold

under repurchase

agreements 6,870,688 7,497,933 6,870,688 7,497,933 (627,245)

- 90 -

g. Offsetting financial assets and financial liabilities

The Bank is eligible to present in the balance sheet on a net basis certain derivative assets and

derivative liabilities pertaining to transactions with counterparties under enforceable master netting

arrangements or similar agreements and there is an intention either to make settlements on a net basis or

to realize the asset and settle the liability simultaneously. A master netting agreement provides for a

single net settlement of all financial instruments covered by the agreement if the counterparty defaults

on any contract. Parties may also settle transactions at gross amounts if a single settlement results in

cash flows being equivalent to a single net amount.

The tables below present the quantitative information on financial assets and financial liabilities that

have been offset in the balance sheets or that are covered by enforceable master netting arrangements or

similar agreements.

December 31, 2017

Gross Amounts

of Recognized

Gross Amounts

of Recognized

Financial

Liabilities

Net Amounts of

Financial

Assets

Presented in

Related Amounts Not Offset in

the Balance Sheet

Financial Assets

Financial

Assets

Offset in the

Balance Sheet

the Balance

Sheet

Financial

Instruments

Cash Collateral

Received Net Amount

Resell agreements $ 249,463 $ - $ 249,463 $ (249,463 ) $ - $ -

Gross Amounts

of Recognized

Gross Amounts

of Recognized

Financial

Assets Offset

Net Amounts of

Financial

Liabilities

Presented in


the Balance Sheet

Financial Liabilities

Financial

Liabilities

in the Balance

Sheet

the Balance

Sheet

Financial

Instruments

Cash Collateral

Pledged Net Amount

Repurchase agreements $ 10,377,142 $ - $ 10,377,142 $ (9,918,038 ) $ - $ 459,104

December 31, 2016

Gross Amounts

of Recognized

Gross Amounts

of Recognized

Financial

Assets Offset

Net Amounts of

Financial

Liabilities

Presented in


the Balance Sheet

Financial Liabilities

Financial

Liabilities

in the Balance

Sheet

the Balance

Sheet

Financial

Instruments

Cash Collateral

Pledged Net Amount

Repurchase agreements $ 12,000,831 $ - $ 12,000,831 $ (11,371,493 ) $ - $ 629,338

39. CAPITAL MANAGEMENT

In according to the authority’s regulation for principles of capital adequacy management, the Bank lists all

the risks into the capital adequacy evaluation scope. In accordance with the operation plans and budget

targets, which approved by the board of directors, also considering the Bank’s development strategy, capital

adequacy, liabilities ratios, and dividend policy, the Bank proposes capital adequacy evaluation plan, which

include stress testing, estimation for each season’s capital adequacy ratio, etc. to ensure the capital

adequacy ratio can be reached and capital structure is sound.

To monitor capital adequacy, the risk management department regularly reports capital adequacy ratios

every month and also quarterly reviews the execution status of and actual operation data variation on the

Bank’s capital adequacy evaluation plan. When the actual capital adequacy ratio might go lower than

target, the Bank immediately reviews the causes, prepares a report and proposes a response strategy to

maintain the appropriate capital adequacy levels.

- 91 -

The Banking Law and related regulations require that the Bank maintain the minimum requirement for

unconsolidated and consolidated capital adequacy ratios (CAR), including the common equity Tier 1 ratio,

Tier 1 capital ratio, and total capital adequacy ratio.

Information on the Bank’s CAR is as follows:

(Unit: In Thousands of New Taiwan Dollars, %)

Year

Items

December 31, 2017

Standalone Consolidated

Elig

ible

capital

Common equity $ 185,317,810 $ 186,356,482

Other Tier 1 capital - -

Tier 2 capital 55,956,433 56,994,138

Eligible capital 241,274,243 243,350,620

Risk

-weig

hted

assets

Credit risk

Standardized approach 1,699,983,398 1,703,971,927

Internal ratings based approach - -

Securitization 4,869,832 4,869,832

Operational risk

Basic indicator approach - -

Standardized approach/alternative

standardized approach 70,096,582 71,479,305

Advanced measurement approach - -

Market risk Standardized approach 20,860,263 20,860,338

Internal model approach - -

Risk-weighted assets 1,795,810,075 1,801,181,402

Capital adequacy ratio 13.44 13.51

Ratio of the common equity to risk-weighted assets 10.32 10.35

Ratio of Tier 1 capital to risk-weighted assets 10.32 10.35

Ratio of leverage 5.51 5.53

Year

Items

December 31, 2016

Standalone Consolidated

Elig

ible

capital

Common equity $ 176,691,923 $ 177,630,492

Other Tier 1 capital - -

Tier 2 capital 60,940,320 62,002,796

Eligible capital 237,632,243 239,633,288

Risk

-weig

hted

assets

Credit risk

Standardized approach 1,749,949,669 1,751,849,566

Internal ratings based approach - -

Securitization 2,525,003 2,525,003

Operational risk

Basic indicator approach - -

Standardized approach/alternative

standardized approach 67,055,930 68,376,295

Advanced measurement approach - -

Market risk Standardized approach 20,838,284 20,846,475

Internal model approach - -

Risk-weighted assets 1,840,368,886 1,843,597,339

Capital adequacy ratio 12.91 13.00

Ratio of the common equity to risk-weighted assets 9.60 9.63

Ratio of Tier 1 capital to risk-weighted assets 9.60 9.63

Ratio of leverage 5.33 5.35

Note 1: Eligible capital and risk-weighted assets are calculated under the “Regulations Governing the

Capital Adequacy Ratio of Banks” and the “Explanation of Methods for Calculating the Eligible

Capital and Risk-Weighted Assets of Banks.”

- 92 -

Note 2: Formulas used were as follows:

1) Eligible capital = The common equity + Other Tier 1 capital + Tier 2 capital.

2) Risk-weighted assets = Risk-weighted asset for credit risk + Capital requirements for

operational risk and market risk x 12.5.

3) Capital adequacy ratio = Eligible capital ÷ Risk-weighted assets.

4) Ratio of the common equity to risk-weighted assets = The common equity ÷ Risk-weighted

assets.

5) Ratio of Tier 1 capital to risk-weighted assets = (The common equity + Other Tier 1 capital) ÷

Risk-weighted assets.

6) Ratio of leverage = Tier 1 capital ÷ Exposure measurement.

40. ASSET QUALITY, CONCENTRATION OF CREDIT EXTENSIONS, INTEREST RATE

SENSITIVITY, PROFITABILITY AND MATURITY ANALYSIS OF ASSETS AND LIABILITIES

a. Asset quality: Table 1 (attached).

b. Concentration of credit extensions

(In Thousands of New Taiwan Dollars, %)

Rank

(Note 1)

December 31, 2017

Industry of Group Enterprise

(Note 2)

Total Amount

of Credit

Endorsement or

Other

Transactions

(Note 3)

Percentage

of Bank’s

Equity

1 Group A

Railway transportation

$ 41,951,293 20.95

2 Group B

Petroleum and coal products manufacturing

18,052,998 9.01

3 Group C

Harbor services

17,960,733 8.97

4 Group D

Computers and computing peripheral equipment

manufacturing

11,823,061 5.90

5 Group E

Cotton and textile

11,454,110 5.72

6 Group F

Cotton and textile

11,368,738 5.68

7 Group G

Shipping agency

10,182,036 5.08

8 Group H

Real estate development

9,809,249 4.90

9 Group I

Iron and steel smelting

9,389,840 4.69

10 Group J

Real estate development

8,049,397 4.02

- 93 -


Rank

(Note 1)

December 31, 2016

Industry of Group Enterprise

(Note 2)

Total Amount

of Credit

Endorsement or

Other

Transactions

(Note 3)

Percentage

of Bank’s

Equity

1 Group A

Railway transportation

$ 47,985,202 25.22

2 Group B

Petroleum and coal products manufacturing

24,452,532 12.85

3 Group C

Harbor services

20,117,499 10.57

4 Group D

Computers and computing peripheral equipment

manufacturing

12,475,052 6.56

5 Group G

Shipping agency

10,468,922 5.50

6 Group F

Cotton and textile

9,800,372 5.15

7 Group I

Iron and steel smelting

8,507,430 4.47

8 Group K

Liquid crystal panel and component manufacturing

8,473,972 4.45

9 Group L

Other electronic parts and components manufacturing not

classified elsewhere

8,156,172 4.29

10 Group E

Cotton and textile

7,990,876 4.20

Note 1: The list shows rankings by total amount of credit, endorsement or other transactions but

excludes government-owned or state-run enterprises. If the borrower is a member of a group

enterprise, the total amount of credit, endorsement or other transactions of the entire group

enterprise must be listed and disclosed by code and line of industry. The industry of the

group enterprise should be presented as the industry of the member firm with the highest risk

exposure. The lines of industry should be described in accordance with the Standard

Industrial Classification System of the Republic of China published by the

Directorate-General of Budget, Accounting and Statistics under the Executive Yuan.

Note 2: Group enterprise refers to a group of corporate entities as defined by Article 6 of

“Supplementary Provisions to the Taiwan Stock Exchange Corporation Rules for Review of

Securities Listings.”

Note 3: Total amount of credit, endorsement or other transactions is the sum of various loans

(including import and export negotiations, discounts, overdrafts, unsecured and secured

short-term loans, margin loans receivable, unsecured and secured medium-term loans,

unsecured and secured long-term loans and overdue loans), exchange bills negotiated,

accounts receivable factored without recourse, acceptances and guarantees.

- 94 -

c. Interest rate sensitivity information

Interest Rate Sensitivity

December 31, 2017


Items 1 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year Total

Interest rate-sensitive assets $ 2,214,760,305 $ 84,152,971 $ 27,194,085 $ 242,089,018 $ 2,568,196,379

Interest rate-sensitive liabilities 900,687,788 1,294,547,469 108,676,697 47,908,620 2,351,820,574

Interest rate sensitivity gap 1,314,072,517 (1,210,394,498 ) (81,482,612 ) 194,180,398 216,375,805

Net worth 183,339,996

Ratio of interest rate-sensitive assets to liabilities 109.20

Ratio of interest rate sensitivity gap to net worth 118.02


December 31, 2016




Interest rate-sensitive assets $ 2,226,291,870 $ 78,409,769 $ 20,003,190 $ 212,280,065 $ 2,536,984,894

Interest rate-sensitive liabilities 875,078,103 1,270,111,617 123,230,949 56,522,353 2,324,943,022

Interest rate sensitivity gap 1,351,213,767 (1,191,701,848 ) (103,227,759 ) 155,757,712 212,041,872

Net worth 179,884,108


Ratio of interest rate sensitivity gap to net worth 117.88

Note 1: The above amounts included only New Taiwan dollar amounts held by the head office and

branches of the Bank (i.e., excluding foreign currency).

Note 2: Interest rate-sensitive assets and liabilities refer to interest-earning assets and interest-bearing

liabilities with revenues or costs that are affected by interest rate changes.

Note 3: Interest rate sensitivity gap = Interest rate-sensitive assets - Interest rate-sensitive liabilities.

Note 4: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets/Interest

rate-sensitive liabilities (in New Taiwan dollars).


December 31, 2017

(In Thousands of U.S. Dollars, %)



Interest rate-sensitive assets $ 12,611,033 $ 1,091,395 $ 197,117 $ 1,337,051 $ 15,236,596

Interest rate-sensitive liabilities 14,917,306 836,189 777,151 - 16,530,646

Interest rate sensitivity gap (2,306,273 ) 255,206 (580,034 ) 1,337,051 (1,294,050 )

Net worth 570,103


Ratio of interest rate sensitivity gap to net worth (226.99 )


December 31, 2016

(In Thousands of U.S. Dollars, %)



Interest rate-sensitive assets $ 11,048,057 $ 880,553 $ 339,015 $ 889,296 $ 13,156,921

Interest rate-sensitive liabilities 13,248,760 613,323 660,986 10,000 14,533,069

Interest rate sensitivity gap (2,200,703 ) 267,230 (321,971 ) 879,296 (1,376,148 )

Net worth 321,380


Ratio of interest rate sensitivity gap to net worth (428.20 )

- 95 -

Note 1: The above amounts included only U.S. dollar amounts held by the head office, domestic

branches, OBU and overseas branches of the Bank and excluded contingent assets and

contingent liabilities.

Note 2: Interest rate-sensitive assets and liabilities refer to interest-earning assets and interest-bearing

liabilities with revenues or costs that are affected by interest rate changes.

Note 3: Interest rate sensitivity gap = Interest rate-sensitive assets - Interest rate-sensitive liabilities.

Note 4: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets/Interest

rate-sensitive liabilities (in U.S. dollars).

d. Profitability

Unit: %

Items December 31,

2017

December 31,

2016

Return on total assets Before income tax 0.47 0.47

After income tax 0.41 0.40

Return on equity Before income tax 7.62 7.80

After income tax 6.61 6.72

Net income ratio 30.45 30.67

Note 1: Return on total assets = Income before (after) income tax/Average total assets

Note 2: Return on equity = Income before (after) income tax/Average equity

Note 3: Net income ratio = Income after income tax/Total net revenues

e. Maturity analysis of assets and liabilities

Maturity Analysis of Assets and Liabilities

December 31, 2017


Total

Remaining Period to Maturity

0 to 10 Days 11 to 30 Days 31 to 90 Days 91 to 180 Days 181 Days to

One Year Over One Year

Main capital inflow on

maturity $ 2,957,557,972 $ 448,397,991 $ 275,917,514 $ 165,743,918 $ 229,432,907 $ 322,971,713 $ 1,515,093,929

Main capital outflow on

maturity 3,456,487,942 223,064,245 169,642,349 426,890,518 418,577,272 680,715,349 1,537,598,209

Gap (498,929,970 ) 225,333,746 106,275,165 (261,146,600 ) (189,144,365 ) (357,743,636 ) (22,504,280 )


December 31, 2016


Total


0 to 10 Days 11 to 30 Days 31 to 90 Days 91 to 180 Days 181 Days to


Main capital inflow on

maturity $ 2,912,579,303 $ 445,925,958 $ 325,498,497 $ 154,386,789 $ 168,278,402 $ 326,999,582 $ 1,491,490,075

Main capital outflow on

maturity 3,411,972,205 220,472,557 179,964,509 430,399,837 414,230,546 658,707,019 1,508,197,737

Gap (499,392,902 ) 225,453,401 145,533,988 (276,013,048 ) (245,952,144 ) (331,707,437 ) (16,707,662 )

Note: The above amounts included only New Taiwan dollar amounts held by the Bank.

- 96 -


December 31, 2017


Total


0 to 30 Days 31 to 90 Days 91 to 180 Days 181 Days to


Main capital inflow on maturity $ 23,562,373 $ 8,293,946 $ 4,288,492 $ 2,800,333 $ 1,801,262 $ 6,378,340

Main capital outflow on maturity 26,730,431 13,132,116 5,222,834 2,654,535 3,498,091 2,222,855

Gap (3,168,058 ) (4,838,170 ) (934,342 ) 145,798 (1,696,829 ) 4,155,485


December 31, 2016


Total


0 to 30 Days 31 to 90 Days 91 to 180 Days 181 Days to


Main capital inflow on maturity $ 21,063,564 $ 8,535,847 $ 3,495,230 $ 2,346,722 $ 1,023,083 $ 5,662,682

Main capital outflow on maturity 24,305,052 12,029,919 4,509,979 2,179,696 3,191,626 2,393,832

Gap (3,241,488 ) (3,494,072 ) (1,014,749 ) 167,026 (2,168,543 ) 3,268,850

Note: The above amounts included only U.S. dollar amounts held by the Bank.

41. TAIWAN COOPERATIVE BANK, LTD.’S TRUST BUSINESS UNDER THE TRUST LAW

a. Trust-related items are those shown in the following balance sheets, statements of income and trust

property list

These items were managed by the Bank’s Trust Department. However, these items were not included

in the financial statements.

Balance Sheets of Trust Accounts

December 31, 2017 and 2016

Trust Assets 2017 2016 Trust Liabilities 2017 2016

Cash in banks $ 3,319,755 $ 2,403,263 Payables Accrued expense $ 2,785 $ 4,250

Short-term investments Others 2,290 2,477

Mutual funds 161,531,937 153,234,175 Mutual funds payable - 200 Stocks 1,294,138 1,735,287 5,075 6,927

Bonds 2,698,757 1,364,377

Structured products 243,571 300,778 Accounts payable on 165,768,403 156,634,617 securities under custody 112,915,054 75,487,067

Securities lending 304,154 833,745 Trust capital Cash 166,811,638 157,272,789

Receivables 6,337 8,844 Real estate 62,103,419 55,568,875

Securities 1,443,645 2,432,186 Real estate Others 110,521 275,144

Land 49,423,289 46,493,613 230,469,223 215,548,994

Buildings 8,523 12,192 Construction in process 11,784,267 9,255,459 Reserves and retained

61,216,079 55,761,264 earnings

Net income 158,119 140,587 Securities under custody 112,915,054 75,487,067 Appropriation (200,645 ) (161,502 )

Retained earnings 182,956 106,727

140,430 85,812

Total $ 343,529,782 $ 291,128,800 Total $ 343,529,782 $ 291,128,800

- 97 -

Trust Property List

December 31, 2017 and 2016

Investment Items 2017 2016

Cash in banks $ 3,319,755 $ 2,403,263

Short-term investments

Mutual funds 161,531,937 153,234,175

Stocks 1,294,138 1,735,287

Bonds 2,698,757 1,364,377

Structured products 243,571 300,778

Securities lending 304,154 833,745

Receivables

Accrued interest 4,972 3,353

Securities sold - 200

Others 1,365 5,291

Real estate

Land 49,423,289 46,493,613

Buildings 8,523 12,192

Construction in process 11,784,267 9,255,459

Securities under custody 112,915,054 75,487,067

Total $ 343,529,782 $ 291,128,800

Statements of Income on Trust Accounts

For the Years Ended December 31, 2017 and 2016

2017 2016

Revenues

Interest revenue $ 6,221 $ 5,117

Cash dividends 54,478 69,127

Realized gain on investment - stocks 12,205 18,077

Unrealized gain on investment - stocks 188,628 237,500

Realized gain on investment - mutual funds 299 59

Unrealized gain on investment - mutual funds - 1,606

Rentals 15,198 27,840

Others 120 5

Total revenues 277,149 359,331

Expenses

Management fees 6,434 8,848

Taxes - 52

Service charge 483 751

Postage 26 28

Unrealized loss on investment - stocks 110,305 202,939

Realized loss on investment - mutual funds 669 18

Unrealized loss on investment - mutual funds - 4,395

Others 1,113 1,713

Total expenses 119,030 218,744

Income before income tax 158,119 140,587

Income tax expense - -

Net income $ 158,119 $ 140,587

b. Nature of trust business operations under the Trust Law: Note 1.

- 98 -

42. ALLOCATION OF REVENUE, COST AND EXPENSE THAT RESULTED FROM THE

SHARING OF RESOURCES BETWEEN TAIWAN COOPERATIVE FINANCIAL HOLDING

COMPANY, LTD. AND SUBSIDIARIES

Under cooperation arrangements, the Bank and Taiwan Cooperative Securities (TCS) promoted securities

brokerage business together; thus, related revenues received by the Bank were calculated as follows: (a)

from the first year to fifth year, revenue based on 20% of the net revenue derived from security

transactions; (b) related revenues from utilizing some operating sites and equipment by the TCS; and (c)

receiving cross-selling service fees of $2,000 thousand annually.

To promote the credit card business together, the Bank and TCS signed cooperation arrangements,

marketing expenses paid by the Bank were based on the arrangements.

As of December 31, 2017 and 2016, the accrued receivables were $3,144 thousand and $2,245 thousand

(part of receivables), respectively. The revenues from cross-selling transactions were $8,394 thousand and

$7,044 thousand (part of other noninterest gains, net) in 2017 and 2016, respectively.

To promote the insurance business together, the Bank and BNP Paribas Cardif TCB Life Insurance Co.,

Ltd. signed cooperation arrangements. The service fees earned by the Bank were based on the agreed

percentage of the premiums from the insurance companies’ products sold by the Bank.

As of December 31, 2017 and 2016, the accrued receivables were $2,499 thousand and $2,419 thousand,

respectively (part of receivables). The revenues from cross-selling transactions were $36,295 thousand

and $32,090 thousand (part of service fee income, net) in 2017 and 2016, respectively.

43. NON-CASH FINANCING ACTIVITIES

Undistributed cash dividends approved by stockholders’ meetings are both $170,524 thousand as of


44. OTHER SIGNIFICANT TRANSACTIONS

The Bank’s application to set up the Changsha Branch in Mainland China was approved by the Financial

Supervisory Commission on December 31, 2015. The Bank invested RMB600,000 thousand in the

Changsha Branch, under the “Regulations Governing Approvals of Banks to Engage in Financial Activities

between the Taiwan Area and the Mainland Area.” The investment in the Changsha Branch was approved

by the Investment Commission under Mainland China’s Ministry of Economic Affairs and relevant

authorities. Changsha Branch started operation on April 27, 2017.

45. ADDITIONAL DISCLOSURES

a. Related information of significant transactions and b. investees:

1) Financing provided: The Bank - not applicable; investee company - not applicable.

2) Endorsement/guarantee provided: The Bank - not applicable; investee company - not applicable.

3) Marketable securities held: The Bank - not applicable; investee company - not applicable.

4) Marketable securities acquired and disposed of at costs or prices of at least NT$300 million or 10%

of the paid-in capital (the Bank disclosed its investments acquired or disposed of): None.

- 99 -

5) Acquisition of individual real estate at costs of at least NT$300 million or 10% of the paid-in

capital: None.

6) Disposal of individual real estates at costs of at least NT$300 million or 10% of the paid-in capital:

None.

7) Allowance of service fees to related parties amounting to at least NT$5 million: None.

8) Receivables from related parties amounting to at least NT$300 million or 10% of the paid-in

capital: Table 2 (attached).

9) Sale of nonperforming loans: Table 3 (attached).

10) Financial asset securitization: None.

11) Other significant transactions which may affect the decisions of users of financial reports: Note 44

to the financial statements.

12) Percentage share in investees and related information: Table 4 (attached).

13) Derivative transactions: The Bank - Notes 8, 35 and 38 to the financial statements; investee

company: None.

c. Investment in Mainland China:

Based on “Regulations Governing Approvals of Banks to Engage in Financial Activities between the

Taiwan Area and the Mainland Area,” the Bank set up the Suzhou Branch, Tianjin Branch, Fuzhou

Branch and Changsha Branch in Mainland China. This investment had been approved by the

Financial Supervisory Commission. The 4 branches’ information - major operating items, capital

stock, the way of investment, investment inflows and outflows, the holding percentage, the investment

income or loss, the book value at year-end, the remitted investment profits and the limit on the amount

of investment in Mainland China - can be seen in Table 5 (attached).

- 100 -

TABLE 1


ASSET QUALITY - NONPERFORMING LOANS AND RECEIVABLES

DECEMBER 31, 2017 AND 2016


Period December 31, 2017 December 31, 2016

Items Nonperforming

Loans (Note 1) Loans

Ratio of

Nonperforming

Loans (Note 2)

Allowance for

Credit Losses

Coverage Ratio

(Note 3)

Nonperforming

Loans (Note 1) Loans

Ratio of

Nonperforming

Loans (Note 2)

Allowance for

Credit Losses

Coverage Ratio

(Note 3)

Corporate banking Secured $ 3,080,261 $ 680,301,703 0.45 $ 7,827,645 254.12 $ 2,967,322 $ 678,321,953 0.44 $ 6,272,474 211.39

Unsecured 1,543,799 554,801,261 0.28 6,864,342 444.64 2,668,904 525,514,607 0.51 7,160,343 268.29

Consumer banking

Housing mortgage (Note 4) 1,196,452 499,209,397 0.24 7,574,524 633.08 979,710 502,456,117 0.19 7,609,102 776.67

Cash card - - - - - - - - - -

Small-scale credit loans (Note 5) 42,159 12,905,632 0.33 106,622 252.90 11,904 12,499,705 0.10 148,551 1,247.91

Other (Note 6) Secured 940,017 263,507,882 0.36 2,557,468 272.07 613,546 254,588,889 0.24 2,015,897 328.56

Unsecured 31,656 8,550,570 0.37 109,908 347.19 25,980 8,926,735 0.29 141,177 543.41

Loan 6,834,344 2,019,276,445 0.34 25,040,509 366.39 7,267,366 1,982,308,006 0.37 23,347,544 321.27

Nonperforming

Receivables

(Note 1)

Receivables

Ratio of

Nonperforming

Receivables

(Note 2)

Allowance for

Credit Losses

Coverage Ratio

(Note 3)

Nonperforming

Receivables

(Note 1)

Receivables

Ratio of

Nonperforming

Receivables

(Note 2)

Allowance for

Credit Losses

Coverage Ratio

(Note 3)

Credit cards 8,482 3,224,127 0.26 53,334 628.79 5,566 2,937,838 0.19 56,009 1,006.27

Accounts receivable factored without recourse

(Note 7) - 1,843,856 - 20,556 - - 561,785 - 6,531 -

Amounts of executed contracts on negotiated debts

not reported as nonperforming loans (Note 8) 1,426 2,363

Amounts of executed contracts on negotiated debts

not reported as nonperforming receivables (Note 8) 9,276 12,487

Amounts of executed debt-restructuring projects not

reported as nonperforming loans (Note 9) 15,968 19,918

Amounts of executed debt-restructuring projects not

reported as nonperforming receivables (Note 9) 46,319 53,335

Note 1: Nonperforming loans are reported to the authorities and disclosed to the public, as required by the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/Non-accrued Loans.”

Nonperforming credit card receivables are reported to the authorities and disclosed to the public, as required by the Banking Bureau’s letter dated July 6, 2005 (Ref. No. 0944000378).

Note 2: Ratio of nonperforming loans: Nonperforming loans ÷ Outstanding loan balance.

Ratio of nonperforming receivables: Nonperforming receivables ÷ Outstanding receivable balance.

Note 3: Coverage ratio of loans: Allowance for credit losses for loans ÷ Nonperforming loans.

Coverage ratio of receivables: Allowance for credit losses for receivables ÷ Nonperforming receivables.

Note 4: The mortgage loan is for house purchase or renovation and is fully secured by housing that is purchased (owned) by the borrower, the spouse or the minor children of the borrowers.

Note 5: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts and exclude credit cards and cash cards.

Note 6: Other consumers banking loans refer to secured or unsecured loans that exclude housing mortgage, cash and credit card, and small-scale credit loans.

(Continued)

- 101 -

Note 7: As required by the Banking Bureau in its letter dated July 19, 2005 (Ref. No. 0945000494), accounts receivable factored without recourse are reported as nonperforming receivables within three months after the factors or insurance

companies refuse to indemnify banks for any liabilities on these accounts.

Note 8: Amounts of executed contracts on negotiated debts that are not reported as nonperforming loans or receivables are disclosed to the public in accordance with the Banking Bureau’s letter dated April 25, 2006 (Ref. No. 09510001270).

Note 9: Amounts of executed debt-restructuring projects not reported as nonperforming loans or receivables are disclosed to the public in accordance with the Banking Bureau’s letter dated September 15, 2008 (Ref. No. 09700318940) and letter

dated September 20, 2016 (Ref. No. 10500134790).

(Concluded)

- 102 -

TABLE 2


RECEIVABLES FROM RELATED PARTIES AMOUNTING TO AT LEAST NT$300 MILLION OR 10% OF THE PAID-IN CAPITAL

DECEMBER 31, 2017


Company Name Related Party Relationship Ending Balance Turnover Rate

Overdue Amounts

Received in

Subsequent

Period

Allowance for

Impairment

Loss Amount Actions Taken

Taiwan Cooperative Bank, Ltd. Taiwan Cooperative Financial Holding Company, Ltd. Parent company $ 1,071,039

(Note)

- $ - - $ - $ -

Note: Receivable - consolidated tax return.

- 103 -

TABLE 3


SALE OF NONPERFORMING LOANS

FOR THE YEAR ENDED DECEMBER 31, 2017


1. Sale of nonperforming loans

Trade Date Counterparty Form of Nonperforming Loan Book Value Selling Price Gain (Loss) Term Relationship Between the

Bank and Counterparty

2017.7.12 The Hong Kong and Shanghai Banking

Corporation Limited

Medium unsecured loans of business $ -

(Note 1)

$ 121,357

(US$ 3,975)

$ 120,883

(US$ 3,975)

None None

2017.7.13 SC Lowy Primary Investments, Ltd. International Syndicated Loan -

(Note 2)

121,620

(US$ 4,000)

121,643

(US$ 4,000)

None None

Note 1: Book value equals the original loan amounting to US$5,108 thousand minus allowance for possible losses amounting US$5,108 thousand.

Note 2: Book value equals the original loan amounting to US$5,109 thousand minus allowance for possible losses amounting US$5,109 thousand.

2. The sale of a batch of nonperforming loans totaling over NT$1 billion (excluding those sold to related parties): None.

- 104 -

TABLE 4


PERCENTAGE SHARE IN INVESTEES AND RELATED INFORMATION



Investee Company (Note 1) Location Main Businesses and Products Percentage of

Ownership Carrying Value

Investment

Gain (Loss)

Percentage Share of the Bank and Its Affiliates in Investees (Note 1)

Note Shares

Pro Forma

Shares (Note 2)

Total

Shares Percentage of

Ownership

Finance-related business

United Taiwan Bank S.A. Belgium Banking 90.02 $ 1,949,463 $ 109,052 2,639,659 - 2,639,659 90.02

Taiwan Asset Management Co., Ltd. Taipei City Acquisition of delinquent loans 17.03 2,370,934 180,601 225,000,000 - 225,000,000 17.03

Financial Information Service Co., Ltd. Taipei City Information service 2.89 135,405 39,281 15,107,985 - 15,107,985 2.89

Taiwan Financial Asset Service Co., Ltd. Taipei City Property auction 5.88 101,125 200 10,000,000 - 10,000,000 5.88

Taiwan Depository & Clearing Co., Ltd. Taipei City Custody of securities and short-term bills 0.84 60,694 4,426 3,624,195 - 3,624,195 1.00

Taiwan Futures Exchange Co., Ltd. Taipei City Futures clearing 1.75 53,468 11,781 5,712,690 - 5,712,690 1.81

Financial eSolution Co., Ltd. Taipei City Office machine wholesaling 9.92 24,934 469 2,181,617 - 2,181,617 9.92

Taipei Forex Inc. Taipei City Foreign exchange brokering 7.06 19,198 5,600 1,400,000 - 1,400,000 7.06

Sunny Asset Management Co., Ltd. Taipei City Acquisition of delinquent loans 0.72 431 50 43,088 - 43,088 0.72

Taiwan Mobile Payment Company Taipei City IT software service 4.00 24,000 - 2,400,000 - 2,400,000 4.00

Non-finance related business

United Real Estate Management Co., Ltd. Taipei City Real estate appraisal 30.00 124,346 4,998 10,115,630 - 10,115,630 30.00

Taiwan Power Company Taipei City Power development and supply 0.24 631,153 - 78,754,764 - 78,754,764 0.24

Taiwan Sugar Company Tainan City Sugar manufacturing 0.08 - 4,657 4,233,752 - 4,233,752 0.08

Lien-An Service Co., Ltd. Taipei City Leasing 5.00 1,250 125 125,000 - 125,000 5.00

Taipei Rapid Transit Co., Ltd. Taipei City Public transportation - 139 8 14,286 - 14,286 -

China Daily News Tainan City Newspaper publishing 0.04 52 - 16,768 - 16,768 0.04

Taipei Financial Center Corp. Taipei City Residence and buildings lease construction

and development

1.63 669,600 31,392 24,000,000 - 24,000,000 1.63

Taiwan High Speed Rail Cooperation Taipei City High speed railroad transportation business 0.95 1,252,550 31,980 53,308,000 - 53,308,000 0.95

Note 1: Shares or pro forma shares held by the Bank, directors, supervisors, president, vice president and affiliates in accordance with the Company Law have been included.

Note 2: a. Pro forma shares are shares that are assumed to be obtained through buying equity-based securities or entering into equity-linked derivative contracts for purposes defined in Article 74 of the Banking Law.

b. Equity-based securities, such as convertible bonds and warrants, are covered by Article 11 of the “Securities and Exchange Law Enforcement Rules.”

c. Derivative contracts, such as those on stock options, are those conforming to the definition of derivatives in Statement of International Accounting Standards No. 39 - “Financial Instruments.”

- 105 -

TABLE 5


INVESTMENTS IN MAINLAND CHINA



Investee

Company Name Main Businesses and Products

Total Amount

of Paid-in

Capital

Investment

Type

Accumulated

Outflow of

Investment

from Taiwan as

of

January 1, 2017

Investment Flows Accumulated

Outflow of

Investment

from Taiwan as

of

December 31,

2017

Investee Net

Income (Loss)

%

Ownership

of Direct or

Indirect

Investment

Investment

Gain (Loss)

Carrying Value

as of

December 31,

2017

Accumulated

Inward

Remittance of

Investment

Earnings as of

December 31,

2017

Outflow Inflow

Suzhou Branch Deposits, loans, import and export,

exchange and foreign exchange

business

$ 4,547,235

(US$ 154,395)

(Note 1)

Direct $ 4,547,235

(US$ 154,395)

(Note 1)

$ - $ - $ 4,547,235

(US$ 154,395)

(Note 1)

$ 519,556 100 $ 519,556 $ 5,390,387 $ -

Tianjin Branch Deposits, loans, import and export,


business

2,947,314

(US$ 97,387)

(Note 1)

Direct 2,947,314

(US$ 97,387)

(Note 1)

-

- 2,947,314

(US$ 97,387)

(Note 1)

207,669 100 207,669 3,036,211 -

Fuzhou Branch Deposits, loans, import and export,


business

2,950,882

(US$ 97,549)

(Note 1)

Direct 2,950,882

(US$ 97,549)

(Note 1)

- - 2,950,882

(US$ 97,549)

(Note 1)

201,997 100 201,997 2,976,410 -

Changsha

Branch

Deposits, loans, import and export,


business

2,630,485

(US$ 87,232)

(Note 1)

Direct - 2,630,485

(US$ 87,232)

(Note 1)

- 2,630,485

(US$ 87,232)

(Note 1)

6,309 100 6,309 2,595,881 -

Accumulated Investment in

Mainland China as of

December 31, 2017

Investment Amount Approved

by the Investment Commission,

MOEA

Maximum Investment

Allowable (Note 2)

$ 13,075,916

(US$ 436,563)

(Note 1)

$ 13,075,916

(US$ 436,563)

(Note 1)

$ 120,286,003

Note 1: Translation into New Taiwan dollars at the exchange rates on the date of each outflow of investment.

Note 2: Based on the Investment Commission’s “Regulation on the Examination of Investment or Technical Cooperation in Mainland China,” investments are limited to the largest of 60% of the Bank’s net asset value or 60% of the Bank’s

consolidated net asset value.

taiwan cooperative bank, ltd. · the date of our auditors’ report. however, future events or...

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